Page 66 - BusinessWest October 12, 2020

deprecation and require a 39-year tax life. For higher-taxed states, cost segre- gation can still make sense when inte- rior improvements are significant.
Taxpayers who elected out of the business interest expense limitation under 163(j) are required to use a 20-year ADS life for QIP and are not eligible for bonus depreciation. In these cases, a cost-segregation study is greatly beneficial because the items segregated into personal-property categories do not get ADS treatment and are therefore eligible for bonus depreciation.
There is also an additional inter- play with the business interest expense
limitation provision. Part of the cal- culation to determine the amount of limited business interest expense for
a given year includes determining the adjusted taxable income (ATI). This calculation favorably considers tax depreciation, but only for one more year. For tax years beginning after 2021, the deduction for depreciation, amor- tization, or depletion are not taken into account in calculating ATI. Thus, any bonus depreciation recognized
on assets identified through a cost- segregation study will incrementally increase the ATI.
Net Operating Losses
Prior to the CARES Act, the Tax Cuts and Jobs Act (TCJA) and other legisla- tion severely constrained the ability to use net operating losses to lower tax liabilities. TCJA restricted carrybacks of NOLs generated in tax years after Dec. 31, 2017 and limited carryforwards to 80% of taxable income.
The CARES Act made two signifi- cant changes to NOLs that provides cash flow for businesses:
• Net operating losses (NOLs), which are generated in 2018, 2019,
or 2020, can now be carried back five years. Businesses that paid federal income taxes in 2013 to 2017 may be able to claim a tax refund as a result of
2018, 2019, or 2020 NOLs. Procedurally, NOLs are carried back to the earliest of their five-year period and then to sub- sequent tax years. But taxpayers may elect to forgo the five-year carryback and carry NOLs forward.
• The CARES Act suspends the 80% limit on carryforwards, allowing NOLs to fully offset taxable income until the end of 2020. An NOL carryback can also free up unclaimed federal tax cred- its and other tax attributes from closed tax years. If the NOL carryback results in credits no longer being used in the closed year, these items are eligible to be carried forward. In addition, if cred- its or other tax attributes were missed on the original return (e.g. unclaimed Research Tax Credit), the taxpayer may determine the unclaimed credits in the closed year and carry them forward without having to amend returns.
“In these unprecedented times, taxpayers should take advantage of the many tax opportunities provided in the CARES Act to maximize tax deductions.”
The calculation of NOLs for tax years beginning in 2019 and 2020
may be greater because of changes
in the CARES Act to Section 163(j).
The changes allow certain taxpay-
ers to increase their business interest expense deduction based on a higher percentage of adjusted taxable income. Taxpayers should also consider the impact of additional tax deprecia-
tion on shorter-lived assets eligible for bonus depreciation, such as QIP, that can be identified from a cost-segrega- tion study. For tax years beginning in 2020, the CARES Act also allows tax- payers to substitute their 2020 ATI with 2019 ATI if it results in a more favorable NOL calculation.
In these unprecedented times, tax- payers should take advantage of the many tax opportunities provided in the CARES Act to maximize tax deductions. Reach out to a tax specialist to discuss how these changes may impact your tax situation. u
Lisa White, CPA is a tax manager at Meyers Brothers Kalicka, focusing primarily on federal and state income-tax compliance and planning within the construction and real- estate industries. Malik Javed, CCSP is a principal at KBKG and oversees engineering operations for cost- segregation projects from KBKG’s Northeast practice.
26 OCTOBER 12, 2020
BANKING & FINANCIAL SERVICES
BusinessWest