In this episode, we focus on the CARES Act, a stimulus package recently passed by Congress to address the COVID-19 crisis. This recording is from a webinar we held for members of our email list and the Cash Flow Community. This $2T stimulus package was passed into law just last week with a bill over 800 pages. We have not extensively gone through the entire bill yet, we're just covering topics specific to real estate investors and small business.Some topics are the paycheck protection program, the temporary moratorium on eviction filings, forbearance of residential mortgage and loan payments for multifamily operators, the technical amendment for qualified improvement property, net operating loss carry-backs, waiver of 10% early withdrawal penalty for retirement accounts, and the stimulus package for individuals.
We will continue to provide updates as more information becomes available. Join the conversation in the Cash Flow Community.
Here's a full report summarizing recent legislation. Please use this report as a guide as you listen to this episode.
The IRS has officially pushed back the filing and payment deadlines to July 15th, 2020 as long as you don't owe more than $1M.
Paycheck Protection Program
If you have a business or are self-employed, you can apply for a loan for qualified costs (payroll costs, retirement, health insurance, mortgage, rent, utilities). There is an 8-week period to apply the loan to any qualified costs. As long as you do not reduce staff by the end of June 2020, 100% of the loan can be forgiven. Also, you must not cut any salaries more than 25% of anyone making less than $100K, to be eligible for full forgiveness through the SBA. You must have less than 500 employees and qualify for a "good-faith" certification, meaning that you state that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operation. Apparently banks will be facilitating this, and they could have additional requirements. It's essentially a replacement of revenue if done correctly to be forgiven on the back end. Typically, forgiven loans are taxable income. There is a clause that says this loan will not be considered taxable income.
Temporary Moratorium for Eviction Filings
120 days after the act is signed into law, if you have a covered property, then you cannot evict your tenants for non-payment of rent. You also can't add additional fees or charge interest. You can't file for eviction during this 120 day period. On day 121, you can file for eviction, but you have to give 30 days notice.
A covered property is a property financed by a federally-backed mortgage loan or a federally-backed multifamily mortgage loan. Any property that participates in the covered housing program is also covered property. Contact your lender - if your mortgage is federally-backed, your tenants may figure this out and stop paying rent.
Also in this section, especially for multifamily operators, you can request a forbearance on your loan so that you don't have to pay principal. Interest will continue to accrue as if you have made payments. You must go to your loan processor and request forbearance. It's a 30-day hold and you must be current on your payments. If you want to extend it, you can do so twice for 60 additional days. You must request the extension 15 days in advance of the end date of your 30-day period.
Temporary Moratorium on Eviction Filings
During a 120 day period beginning on the date the Act is signed into law, the landlord may not initiate legal action to recover possession of the property from the tenant for nonpayment of rent or other fees or charges. The landlord may also not charge fees, penalties, or other charges to the tenant related to the nonpayment of rent.
Additionally, the landlord may not require the tenant to vacate the unit before the data that is 30 days after the date on which the landlord provides the tenant with a notice to vacate. The landlord may not issue a notice to vacate until the 120 day period, after the Act has been signed into law, has passed.
The Technical Amendment for Qualified Improvement Property
Qualified Improvement Property: Commercial/Nonresidential property. Typically when you make improvements, it's considered qualified improvement property. These are improvements made to the interior of the commercial building - nonresidential property. The Tax Cuts and Jobs Act intended to change this property to a 15 year life from a 39 year life. On the final bill, they failed to make this technical change. This qualified improvement property was not able for bonus depreciation. The CARES Act has changed the life of qualified improvement property to 15 years, retroactively to Jan. 1, 2018. You need to look at your tax returns and see if you should go back and fix them to claim 100% bonus depreciation. You likely will want to amend these returns and change the useful life of this qualified improvement property.
Technical Amendment for Qualified Improvement Property
The 2017 TCJA left commercial property owners in a bad spot. All other property owners were celebrating IRC Sec 168(k)’s new 100% bonus depreciation clause for all improvements with a useful life of less than 20 years. Qualified Improvement Property (QIP) was intended to have a 15-year life and qualify for 100% bonus depreciation, however the final bill left QIP with a 39 year life and disqualified QIP for 100% bonus depreciation.
QIP is generally defined as any improvement made to the interior portion of a nonresidential building after the building was placed in service.
The Act makes a technical correction including QIP as eligible property for 100% bonus depreciation.
Planning considerations for real estate investors: if you had QIP in 2018 or in 2019, get with your advisors now to determine how you need to fix previously filed returns to 100% bonus depreciate the QIP and claim a refund. You may be able to make a late election described in Rev. Proc. 2019-33 by either filing an amended 2018 tax return or a Form 3115 and 481(a) adjustment on your 2019 or 2020 tax return.
Net Operating Loss Carry-Back
A net operating loss is when you have business expenses in excess of business income.
Prior to this CARES Act, a net operating loss could not be carried back. It must be carried forward. Carrying forward in future years, you could only apply 80%. Excess business losses are business losses in excess of $250K for a single filer and $500K for married filing jointly filers. You typically can't use these losses against other forms of income.
Now, after the CARES Act, excess business losses have been suspended retroactively to 2018, as if it never existed. Section 172 has also been amended to say that net operating losses can be carried backward 5 years. The point of this is to give landlords and real estate investors cash flow immediately, essentially through giving a refund. If you're in a situation where you can or could retroactively create a net operating loss, then you should look at amended your returns and carrying your losses back 5 years.
Net Operating Losses
Prior to the 2017 TCJA, NOLs could be carried back two years and carried forward indefinitely. After the 2017 TCJA amended IRC Sec 172, NOLs could not be carried back and the carry forward was limited to 80% of taxable income.
The Act has struck the 80% taxable income limitation for any NOL arising before January 1, 2021. Additionally, for NOLs arising in 2018, 2019, or 2020, taxpayers can carryback the NOL five years.
The election to carryback an NOL must be made by the due date, including extensions, of the taxpayer’s 2020 tax return.
Lastly, there is a temporary removal of excess business losses under IRC Sec 461(l) which was added as part of the 2017 TCJA. This section provides that the amount of net business loss an individual may use to offset other, non-business sources of income is capped at $250,000 (if single and $500,000 if married filing jointly). Any excess loss is converted into a net operating loss.
The removal of Sec 461(l) is retroactive to 2018 and will be re-implemented in 2021. When this section kicks back in during 2021, wages will no longer be considered “business income.”
Planning considerations for real estate investors: Excess business losses as described in IRC Sec 461 limited the amount of non-passive rental losses qualifying investors could claim against their other income. Any excess business loss was considered to be a Sec 172 NOL and subject to the 2017 TCJA amendments to Sec 172.
With the passage of this Act, Sec 172 now allows NOLs to be carried back five years. If your rental losses on your 2018 or 2019 tax return resulted in an excess business loss that you were forced to carry forward, contact our team to go over your options of applying the NOL to previously filed tax returns. This will result in an immediate refund to you.
Stimulus Checks/Payments to Individuals
Provides one-time direct payment to individuals and families within the next three weeks.
For individuals with incomes up to $75,000, the Act provides a $1,200 payment, phasing out at a rate of $5 for every $100 in income above $75,000. The payment is phased out entirely for an individual making $99,000.
Married couples with combined incomes up to $150,000 would receive $2,400, subject to the same phaseout as that applying to individuals. The payment is phased out entirely for a married couple making more than $198,000.
The provision also provides an additional $500 per child which is also subject to the phase out.
Eligibility and benefit levels are based on 2019 income tax filings if the taxpayer has filed. 2018 tax data and Social Security data can be used in lieu of 2019 data if the taxpayer has note filed. Individuals will not be required to repay any overpayment when filing their 2020 taxes.
For individuals and families with low or zero net tax liabilities, including the disabled, the full benefit is refundable, which means that taxpayers with no income or income tax liability are eligible to receive the credit.
Waiver of 10% Early Withdrawal Penalty for Retirement Account
The Act waives the 10% early withdrawal penalty for qualifying individuals, who may withdraw up to $100,000 from retirement accounts without facing penalty.
The Act allows you to spread the tax liability from the withdrawal over a three year window. Qualifying taxpayers would also be allowed to repay their retirement plans to make up for money withdrawn to pay coronavirus-related expenses.
The distribution must be a “coronavirus distribution” which means any distribution taken from a qualified retirement account between January 1, 2020 and December 31, 2020 to an individual who is (1) diagnosed with COVID by a CDC test; (2) whose spouse or dependent is diagnosed with COVID by a CDC test; or (3) who experiences adverse financial consequences as a result of being quarantine, furloughed, or laid off or having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual.
The Act temporarily waives required minimum distribution rules for retirement accounts, preventing retirees from having to sell retirement assets during the downtown.