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Real Estate Businesses Can Revoke 163(j) Election and Cash in on Bonus Depreciation Fix

By: Amanda Wilson

The 2017 Tax Cuts and Jobs Act introduced a new Section 163(j) limitation on deducting business interest expense (our prior discussion of this tax law change can be found here). Specifically, businesses could only deduct net business interest in any given year equal to 30% of adjusted taxable income.

Real estate businesses could make a Section 163(j) election to elect out of this limitation, although doing so meant that they had to use the less favorable alternate depreciation system. Many real estate businesses made the Section 163(j) election as the benefit of avoiding the 30% limitation was more advantageous than the impact of using the alternate depreciation system.

Fast forward to 2020, and the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. One of the key tax changes in the CARES Act was fixing a technical glitch in the 2017 Tax Cuts and Jobs Act so that qualified improvement property was eligible retroactively for 100% bonus depreciation (this fix discussed previously here).

Many real estate businesses suddenly realized that they had the opportunity to take a full write off of past improvements to non-residential real property, provided they had not made the Section 163(j) election.

If a taxpayer had made the Section 163(j) election, the qualified improvement property would not qualify for the 100% bonus depreciation. This is because qualified improvement property is treated as 20-year property under the alternate depreciation system, (compared to 15-year property under the standard depreciation system after the CARES Act fix), and only property with a less than 20-year recovery period could qualify for 100% bonus depreciation. As a result, many real estate businesses are left in the position of regretting their Section 163(j) election.

Happily, the IRS is giving these real estate businesses the opportunity to revisit their election. The IRS has now issued Revenue Procedure 2020-22, which allows real estate businesses the opportunity to revoke their prior Section 163(j) election. Taxpayers who revoke their election will be treated as though the election had never been made, and will now be able to benefit from the 100% bonus depreciation available for qualified improvement property.

A taxpayer revokes its prior Section 163(j) election by timely filing an amended Federal income tax return, amended Form 1065, or administrative adjustment request, as applicable, for the taxable year in which the election was made, with an election withdrawal statement. The election withdrawal statement should be titled, “Revenue Procedure 2020-22 Section 163(j)(7) Election Withdrawal.”

The statement must contain the taxpayer’s name, address, and social security number or employer identification number, and must state that, pursuant to Revenue Procedure 2020-22, the taxpayer is withdrawing its election under section 163(j)(7)(B) or 163(j)(7)(C), as applicable.

It should be noted that the CARES Act also made changes to the Section 163(j) business interest limitation for 2019 and 2020 tax years, which will be the subject of a separate article. Stay tuned!

Be sure to visit our Coronavirus (COVID-19) Resource Center page to keep up to date on the latest news.

IRS Extends Like-Kind and Qualified Opportunity Zone Deadlines

By: Amanda Wilson

Section 1031 of the Internal Revenue Code allows a taxpayer to sell real property (the relinquished property) and replace it with real property of a like-kind (the replacement property) without recognizing tax on the sale if certain requirements are met. Two of those requirements are that the taxpayer must identify replacement property within 45 days of the sale of the relinquished property and acquire the replacement property within 180 days of the sale of the relinquished property.

Similarly, Section 1400Z-2 of the Internal Revenue Code allows taxpayers several benefits if the taxpayer has capital gains that he or she invests in a qualified opportunity fund within 180 days. These benefits include deferring the capital gains, usually until December 31, 2026, and potentially avoiding any taxable gain on the liquidation of the qualified opportunity fund investment if the investment is held for at least ten years.

These 45-day and 180-day requirements were causing concern for taxpayers given the current state of the country as a result of the coronavirus pandemic. In recognition of this, the Internal Revenue Service issued Notice 2020-23 last night, extending the deadline to July 15, 2020, for several types of returns or other filing obligations which were due to be performed on or after April 1, 2020, and before July 15, 2020.

The notice specifically provides an automatic extension until July 15, 2020, of the Section 1031 45-day and 180-day periods and the Section 1400Z-2 180-day period for any period that would end on or after April 1, 2020, and before July 15, 2020. An extension is not available if the 45-day or 180-day period expired prior to April 1.

This is good news for taxpayers that were struggling to complete their like-kind exchange or opportunity fund investment.

Be sure to visit our Coronavirus (COVID-19) Resource Center page to keep up to date on the latest news.

Partnerships Can File Amended Returns to Cash in on CARES Act Benefits

By: Amanda Wilson

The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act was signed into law by President Trump last month. As we have previously discussed, the CARES Act contains several tax law changes that are designed to allow taxpayers to file amended returns and obtain much needed cash flow in the form of tax refunds (a list of our prior articles on these tax changes can be found here under the heading Tax).

Unfortunately, taxpayers that are taxed as partnerships were facing an issue as a result of the Bipartisan Budget Act of 2015 (BBA), which went into effect for tax years beginning after December 31, 2017. Under the BBA, partnerships could no longer file amended returns for 2018 or later tax years, but rather had to file an administrative adjustment request. Any adjustments as a result of an administrative adjustment request are taken into account in the year that the request is filed.

Consequently, without corrective relief, a partnership trying to take advantage of the CARES Act tax changes by filing an administrative adjustment request now would only receive the benefit on its 2020 tax return, which would not be filed until 2021. This delay was clearly not what was intended with the CARES Act.

Fortunately, the Internal Revenue Service yesterday provided partnerships with relief by issuing Revenue Procedure 2020-23. This revenue procedure gives partnerships the ability to amend a return filed for 2018 or 2019 provided (i) the return was filed prior to the issuance of the revenue procedure, and (ii) the amended return is filed before September 30, 2020. Partnerships can file amended returns to take advantage of the CARES Act tax changes and get the benefit now of any available tax refunds.

The amended returns are allowed to take into account any tax changes brought by the CARES Act as well as any other changes the partnership is entitled to take under the tax code. To file an amended return, the partnership must file a Form 1065, with the amended return box checked and with “Filed Pursuant to Rev. Proc. 2020-23” written across the top of the form.

Amended returns can be filed electronically or by mail, although filing electronically may result in faster processing time given the likelihood of service center closures as a result of the coronavirus pandemic.

Partnerships currently under examination for the year being amended must send a copy of the amended return to the revenue agent coordinating the examination.

Businesses with NOLs or qualified improvement property should consult their tax advisors to see if they can benefit from these tax changes. If so, an amended return could result in a refund and some much needed additional cash flow.

Be sure to visit our Coronavirus (COVID-19) Resource Center page to keep up to date on the latest news.

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