The Coronavirus Aid, Relief and Economic Security Act (commonly referred to as the CARES Act) provides relief to businesses and individuals, as our nation slowly recovers from the economic impact caused by the COVID-19 pandemic.
This article will focus on how the CARES Act will not only provide relief, but potentially offer the real estate professional an opportunity for continued growth and success.
1- The CARES Act and What Does It Mean to Me?
When the CARES Act was signed on March 27, 2020, a $2 trillion corona virus economic stimulus bill was enacted to provide relief for many sectors of our nation’s economy at both the individual and business levels. Included are those in the various real estate professions, such as real estate investment companies, investment property management, developers/contractors, and residential/commercial landlords to mention just a few.
The CARES Act attempts to accomplish relief through provisions such as:
Tax Rebates, Credits, and Deductions
- Loosening of restrictions on Net Operating Losses and Excess Business Losses
- Bonus depreciation for qualified improvement property
Payroll Tax Relief
- Employer payroll tax deferrals
- Refundable employee retention tax credits
Relief Loans
- Employer payroll tax deferrals
- Refundable employee retention tax credits
As we will discuss and illustrate in further detail, by properly utilizing the above provisions, the real estate professional can achieve the maximum benefits intended by the Act.
2- Net Operating Losses, Excess Business Losses and Benefiting from Losing?
When a business’ expenses are more than its income, that is considered a loss, also known as a Net Operating Loss (NOL).
The CARES Act now allows a type C corporation to carry back an NOL arising in 2018 (or later) to tax years as far back as 5-years without limitation. Any remaining NOL not utilized during the carryback period can be brought forward to future tax years.
An NOL occurring in either 2018 or 2019 can potentially generate a quick and substantial inflow of cash through amending previously profitable tax returns. This can present an opportunity to both larger real estate companies but also to those that just consider themselves to be currently at the level of “real estate investing for beginners” or as the old expression goes “real estate investing for dummies”. While through proper current year planning, it is possible to gain control over the maximum benefit available. For example, accelerating expenses into 2020 could create or increase an NOL which a C Corporation could use to offset profit in prior years, thus providing additional cash liquidity for 2021. Cash liquidity for not only business operations, but also to capitalize on situations such as when investment property for sale present themselves.
Similar to type C corporations, noncorporate taxpayers (i.e. individuals, type S corporations, partnerships, and LLCs) operating in areas such as the wholesale real estate market or home investors looking for that perfect investment house opportunity can benefit from the ability in carrying back an NOL for up to 5-years without limitation. In addition, individuals are also afforded the opportunity to apply a business NOL against non-business income (i.e. wages, interest, dividends, etc.) without restrictions. By reducing non-business income and lowering total tax, one can put themselves in the position to have cash to look for more income property investments, join a real estate investment club or partake in any other activity to further their real estate “dynasty”.
3- Bonus Depreciation for Qualified Improvement Property and HOW MUCH Can I Write-off?
The CARES Act has provided the real estate industry with a very favorable “fix” to a drafting error created by the (TCJA) tax reform of late 2017.
Qualified improvement property (commonly referred to as “QIP”) are any improvements made to the interior portion of an existing commercial building. Examples include installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical, and plumbing.
Retroactive to January 1, 2018, the CARES Act changes the depreciable life of qualified improvement property back to 15-year property and once again making it eligible for 100% bonus depreciation write-offs.
The following illustrates how changes to qualified improvement property can directly and significantly benefit you. Real estate investment firms, such as one of our clients who also happens to be a commercial landlord, spent almost $400,000 on qualified improvement property during 2018. Prior to the CARES Act only a small amount of the total improvement cost was able to be deducted on their 2018 tax return. Due to the changes the CARES Act made with respect to 100% bonus depreciation we were able to amend our client’s 2018 tax return allowing them to deduct 100% of the improvement costs and generating an NOL. By carrying back the newly created NOL, our client will receive a tax refund (“cash in their pocket”) of over $50,000 during the current year. These funds can and will provide many opportunities for our client but one that is of extreme importance to them will be the beginning of moving away from having to rely on real estate investment banking as their only funding source.
Payroll Tax Relief
4- Employer Payroll Tax Deferrals, I Don’t Have to Pay Payroll Taxes Anymore?
Well not exactly. As an owner of a property investment company might tell you, it’s impossible to operate without employees. With employees comes the responsibility of payroll taxes. Although as an employer you are still responsible for collecting and remitting employee withholdings, along with your share of Medicare tax to the IRS. However, in an effort to relieve cash flow issues, the CARES Act allows for the deferral of the employer’s share of Social Security taxes for periods ending before January 1, 2021. The deferred amounts need to be paid over the next two years with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022. To illustrate, a client who is a real estate investment management company, expects to pay wages upwards of $250,000 between July 1st and December 31st. By deferring the payment of employer Social Security tax, they will have at their disposal over $15,000 to use towards other business expenses rather than potentially having to apply for interest bearing loans.
5- Refundable Employee Retention Tax Credit, Am I Eligible Too?
If you found that your business operations were suspended (even partially) due to government mandate, or your gross receipts have significantly decreased due to the COVID-19 pandemic, the CARES Act is potentially here to aid. This aid comes in the form of allowing for a refundable payroll tax credit against certain employment taxes equal to 50% of wages paid or incurred from March 13th through the end of the year.
Does my business qualify as an eligible business to claim the credit? Did my business suffer a significant decrease in gross receipts due to the COVID-19 pandemic? Do all of my business’ wages qualify for the 50% credit? Does applying for the retention tax credit conflict with other CARE Act provisions I might have already received? All of these and many other questions must be considered before a business claims this credit.
Stimulus Relief Loans
6- Which Loan is Right for Me?
The CARES Act has provided for two relief loans in an effort to assist small businesses facing financial hardship due to the COVID-19 pandemic.
The Payroll Protection Program loan, (“PPP” loan), is designed to provide incentive for business owners to keep their employees on payroll during the pandemic. The major features of the PPP loan:
- available to small businesses with less than 500 employees.
- borrowable amount is equal to 2.5 times average monthly payroll costs not to exceed $10 million.
- loan proceeds can be used for the payment of payroll costs, rent/lease payments, utilities and certain on mortgages and other debt obligations.
- potential for loan forgiveness if certain requirements are met, otherwise amount not forgiven is repayable with a 1% interest rate over 5 years.
The Economic Injury Disaster Loan (“EIDL”), a loan that is made available in federally declared disaster areas, is not new, but for the first time ever is eligible to any small business located in any of the 50 states that has experienced an economic injury due to the pandemic. The major features of the EIDL:
- loan proceeds can be used for almost any type of business expense and debt.
- advance grant available up to $10,000
- low interest rate (maximum 3.75%) with a 30-year repayment term (unlike the PPP loan, EIDL proceeds are not eligible for forgiveness)
7- What Should I Do Now?
A great question that I am sure you are asking yourself right now. The above article was intended to give you an overview of what life as a real estate professional in relation to the CARES Act might mean to you. An Act that includes relief measures (such as payroll deferrals and credits, and various loans) to aid during the current pandemic, and tax changes (such as loosening of NOL restrictions and 100% bonus depreciation) to potentially provide an immediate cash flow for continued business growth and success.
For more detailed general information and how the CARES Act provisions might apply to you, click the link below which will take you directly to our firm’s website. By providing your information to us on the contact page, we can set up a time to schedule a free 30-minute consultation and review of prior year returns.