For many manufacturers, 2020 has been a year like no other due to the novel coronavirus (COVID-19) pandemic, and cash flow is a major issue. The Coronavirus Aid, Relief, and Economic Security (CARES) Act retroactively modifies certain business-related sections of the Tax Cuts and Jobs Act (TCJA) that can help provide quick liquidity. To take full advantage of these CARES Act provisions, you may need to file one or more amended tax returns.
More favorable loss deduction rules
A net operating loss (NOL) generally occurs when a company’s deductible expenses exceed its income. Under the TCJA, for NOLs that arise in tax years starting after December 31, 2017, the maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. Also, under the TCJA, NOLs incurred in tax years ending after December 31, 2017, generally cannot be carried back to an earlier tax year but can be carried forward indefinitely (as opposed to the 20-year limit under pre-TCJA law).
Under the CARES Act, for NOLs arising in 2018, 2019 or 2020, businesses can now carry back the NOLs to the prior five tax years. In addition, for tax years beginning before 2021, businesses are generally allowed an NOL deduction equal to 100% of taxable income.
This means that businesses can potentially carry back an NOL as far as 2013 (if generated in 2018). Carrying back an NOL is particularly beneficial if you were previously in a higher tax bracket. Filing an amended return to secure a tax refund will help improve your cash flow.
Noncorporate taxpayers may benefit from another loss-related change made by the CARES Act. The TCJA had set a new limit applicable to deductions for current-year business losses incurred by noncorporate taxpayers, known as the “excess business loss” limitation. The CARES Act retroactively turns off the limitation for 2018, 2019 and 2020.
If you were subject to the limitation in 2018 (or 2019, if you’ve filed a return already), you can file an amended return to remove the limitation. That will either 1) further reduce your tax liability, which will produce a refund, or 2) create an NOL, which can now be carried back.
Liberalized business interest expense limitation
Generally, under the TCJA, interest paid or accrued by a business is deductible only up to 30% of adjusted taxable income (ATI). Taxpayers with average annual gross receipts of $25 million or less for the three previous tax years are generally exempt from the interest deduction limitation. So, many smaller manufacturers are already exempt from this rule.
But if this rule applies to your business, the CARES Act generally increases the business interest expense limitation for the years 2019 and 2020 from 30% to 50% of ATI. It also allows businesses to use 2019 ATI in calculating their 2020 limitation.
This means that some manufacturing companies should be able to deduct more interest expense in 2019 and 2020. If an NOL is generated (or increased) in either of those years because of the bigger interest expense deduction, that NOL may be carried back to earlier years, and it will not be subject to the 80% limitation.
If your cash flow is tight, the CARES Act may help. Contact your tax professional to learn more and possibly get started on filing amended federal returns.
Sidebar:Got QIP? It may save you tax now and in the future
Another tax-relief provision of the CARES Act that may help cash flow involves real estate qualified improvement property (QIP).
Under the TCJA, QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. When drafting the TCJA, members of Congress intended to designate QIP as 15-year property, making it eligible for 100% bonus depreciation. However, due to a drafting error, the 15-year-property designation for QIP never made it into the actual statutory language of the TCJA, and therefore, QIP was classified as 39-year property.
Effective for property placed in service after 2017, the CARES Act corrects this drafting error. As a result, if you had QIP in 2018 (or in 2019 and have already filed your 2019 return), you can file an amended return to 1) switch from a 39-year recovery period to a 15-year recovery period, or 2) claim 100% bonus depreciation on QIP. Alternatively, you can file Form 3115 (Application for Change in Accounting Method) to claim an adjustment.