Page 24 - BusinessWest July 6, 2020
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• If the 2019 tax return has already been filed, an amended return should be filed for both
the 2018 and 2019 tax years. Taxable income in 2018 will be reduced by the additional $148,237 ($150,000 – $1,763) of accelerated depreciation expense, and taxable income in 2019 will be increased by the removal of the $3,846 of depre- ciation expense originally recognized.
• If the 2019 tax return has not yet been filed, filing a Form 3115 might provide the easier option. Instead of filing two years of returns, only the 2019 tax return is filed, and the $148,237 of additional accelerated depreciation expense not captured in 2018 is included in the 2019 tax return as a section 481(a) adjustment.
It is important to note that there are certain circumstances where either an amended return or an administrative adjustment request (AAR) must be filed. It is important to consult with your tax advisor to determine the best course of action.
Changes to the Business Interest Limitation
Although most of the provisions enacted as part of the TCJA were intended to be favorable
to taxpayers, some new components had the opposite effect. One of these was the revision and expansion of the business-interest-limitation rules. If subject to the new rules, the regulation essentially limited the amount of business inter- est expense to 30% of taxable income adjusted for, among other things, depreciation.
The interest expense in excess of this 30% thresholdwouldnotbedeductibleinthecurrent year but would instead be carried forward to the
following tax years.
The TCJA also included an option for certain
businesses to elect out of having this regulation apply. Instead, these businesses that met the def- inition of a ‘real property trade or business’ could make an irrevocable election to realize a longer recovery period for the cost of real property and to forego any bonus depreciation that would oth- erwise be allowed on that real property.
as well to reflect any changes to taxable income resulting from withdrawing the election.
So, What Now?
The CARES Act provides several relief provi- sions, including a number that can be realized through proper tax planning. Owners of non- residential (i.e. commercial) real property should review any expenditures that were capitalized in 2018 and 2019 to see if any of these costs can be realized now under the new qualified improve- ment property measures.
Also, it would be prudent to review any elec- tions made during those tax years that might need to be revisited to make sure those elections
Prior to the retroactive change under the CARES Act, the differences in the recovery peri- ods were not substantial, and none of the real property was eligible for bonus depreciation. However, with the CARES Act’s retroactive fix to qualified improvement property, that property is now eligible for bonus depre-
ciation. The loss of being
able to take that accelerated
depreciation, in addition to
another CARES Act provi-
sion increasing the limitation
threshold from 30% to 50%
(for all businesses except
partnerships) for 2019 and
2020, might now result in
the impact of the irrevocable election having an undue, unfavorable result.
To provide relief to those businesses that made the irrevocable election and that could now benefit from the shorter recovery period, and the applicable depreciation methods, the IRS has issued guidance that provides for the irrevocable election to be rescinded for tax years 2018 or 2019. This is accomplished by filing an amended return for the year the election was made.If2018wastheelectionyear,and2019 has already been filed, 2019 must be amended
“Although most of the provisions enacted as part of the TCJA were intended to be favorable to taxpayers, some
still result in the most favorable tax position. As with most things related to the tax code,
the final answer is usually complex and nuanced and somewhere in the grey. But with proper planning and timely tax-advisor consultation, realizing additional relief during these unprec- edented times can be achieved. u
Lisa White, CPA is a tax manager at Holyoke- based accounting firm Meyers Brothers Kalicka, P.C.;(413)536-8510.
 new components had the opposite effect.
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