Earlier this year, Congress approved and President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act—legislation designed to help boost our economy through spending provisions and various tax incentives. While the Paycheck Protection Program (PPP) loans from the CARES Act received much attention, and our experts have continued to provide detailed insights to help you better understand this legislation, this article will uncover opportunities for manufacturers.
Net Operating Losses (NOLs)
The CARES Act brings back the option to carry-back net operating losses (NOL) for both business and individual taxpayers. The rules were modified to allow NOLs generated in 2018, 2019 or 2020 to be carried back to the five prior tax years. In addition, the 80 percent of taxable income NOL limitation from the TCJA was postponed until 2021.
Impact: This NOL change is most beneficial for manufacturers that incurred significant losses recently, such as from the impact of the Coronavirus or from 100 percent bonus depreciation. Further, taxpayers who paid taxes over the past five years at higher tax rates up to 35 percent (for corporations) or 40 percent (for individuals) will greatly profit from the carryback of current NOLs. Under this provision, manufacturers could potentially use their recent losses to eliminate the prior years’ income, resulting in significant tax refund claim opportunities.
Business Interest Expense Limitation
Before the CARES Act was passed, the deduction for business interest expense was limited to 30 percent of a taxpayer’s adjusted taxable income (ATI). ATI was defined essentially as a company’s taxable income before its depreciation, amortization, and interest expense. This threshold was increased by CARES to 50 percent of ATI for tax years beginning in 2019 and 2020.
Impact: This change provides taxpayers that have significant debt and interest expense additional relief by allowing extra interest expense to be deducted.
Qualified Improvement Property
Qualified Improvement Property (QIP) was inadvertently not identified as 15-year property in the Tax Cuts and Jobs Act of 2017 (TCJA). This meant that QIP additions after 2017 were considered 39-year property and thus not eligible for 100 percent bonus depreciation. Fortunately, this drafting error in the TCJA legislation was fixed retroactively under the CARES Act. Manufacturers can now deduct current and prior years’ depreciation on their next tax return, provided the correct forms are filed to document this treatment. Taxpayers can also go back and file refund claims instead if this is a better alternative for them. The IRS recently issued detailed guidance to assist taxpayers in realizing this QIP relief.
Impact: This change can help taxpayers that may have recently pursued a remodeling project or updated large interior parts of their buildings.
While tax changes are common in Washington, the above items are unique opportunities manufacturers and distributors can take advantage of now to position their companies for recovery through the pandemic. Please contact our Sikich team to learn more.