Earlier this year a new federal income tax act was passed called the Coronavirus Aid, Relief and Economic Security Act, The “CARES Act.” The act provides two tax planning opportunities that many business owners could benefit from.
1. Qualified Improvement Property
The first opportunity has to do with Qualified Improvement Property (QIP). Legislation was passed in 2017 and erroneously excluded certain capital improvements from 100% write off in the year incurred. As a result, any business that spent money on capital improvements such as building out a new office space had to capitalize this expenditure and depreciate it over usually 15 years.
The CARES ACT corrects this error. Therefore, QIP is now eligible for 100% depreciation (write-off). Importantly, the act makes this change retroactively to January 1, 2018 (not January 1, 2019). This means that if you incurred any QIP expenditures after 2017 and filed a tax return capitalizing these expenditures you can now go back and file an amended return to take the entire amount off of your taxable income.
Generally, QIP property includes:
- Certain leasehold improvement property
- Restaurant property
- Retail improvement property
2. Net Operating Loss Carry-Back
Also included with the CARES Act, corporations, partnerships and certain other taxpayers are permitted to carry-back net operating losses up to five years for taxable years 2018, 2019 and 2020.
The significance of this provision is that if you had profitable years in the previous tax years, but this year, given the current economic conditions, you incur a loss, you can use this loss to “carry it back” to years where you were profitable to reduce your taxable income from those year(s).
Both Opportunities Improve Cash Flows
These changes could provide small businesses with much needed additional cash flow. As typical with anything related to tax law there are certain exceptions and restrictions, but for the most part if you have one of the above circumstances, you should be able to benefit.