By: Caroline Kaye CPA, Supervisor –
With the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020, by Congress, there have been many questions about how the CARES Act will impact the real estate industry. For businesses, the provisions of the CARES Act are centered around increasing liquidity, such as through the deferral of payroll taxes, net operating loss changes, and the increase in the deductibility of business interest. Below are some of the aspects of the CARES Act that will benefit the real estate industry.
Payroll Protection Program (“PPP”). One of the provisions of the CARES Act is the establishment of the Payroll Protection Program from the Small Business Administration (“SBA”). The loan program is for up to two and a half times a company’s average payroll for the 2019 year, up to $10 million. The loans are one percent fixed-rate loans with the possibility of being forgivable. The potential for the loan being forgivable hinges on how the loan is utilized. Seventy-five percent (75%) of the loan must be used to pay payroll expenses and the remainder must be used for normal operating expenses (i.e. rent, utilities, healthcare for employees). It should be noted that independent contractors and companies without payroll are eligible for the payroll protection loan; however, the loan would not be forgivable.
Economic Injury Disaster Loan Program (“EIDL”). The Economic Injury Disaster Loan is also a loan provided by the Small Business Administration. The EIDL is a loan for up to $2 million with a payback period of 30 years. The loan has a 3.75% interest rate and can be used in conjunction with the Payroll Protection Program as long as the loans are used to pay for different expenses. The EIDL also provides a $10,000 forgivable advance on the loan.
Small Business Administration 504 Loan Program. The 504 loan program is available through Certified Development Companies (CDCs), SBA’s community-based partners for providing 504 loans. The loan program is designed to aid in the purchase of fixed assets, such as land, buildings and long-term machinery, as well as the construction of buildings. The loan is 90% financing with fixed interest rates and longer amortization periods with 50% of the loan from the SBA and 40% for the loan from a participating lender, requiring the company to only pay for 10% of the costs.
Employee Retention Credit. The CARES Act provides an employee retention credit for companies who continue to pay their employees in the wake of the coronavirus outbreak. The credit is for 50% of eligible wages up to $10,000 and is available for the 2020 tax filing year. This credit applies to companies that fall into one of two categories: 1) business is fully or partially suspended due to government shutdowns or 2) the company’s gross receipts are below 50% of the comparable 2019 quarter.
Deferral of Payroll Taxes. Companies are eligible to defer the employer’s portion of Social Security and Medicare taxes. The taxes will be 50% payable at the end of 2021 and the remaining 50% payable at the end of 2022. The deferral is only available to those businesses that do not receive a PPP loan.
Qualified Improvement Property. Qualified improvement property is defined as an improvement to the interior of a nonresidential building, except for improvements for 1) enlarging the building, 2) an elevator or escalator, or 3) the internal framework of the building. The Tax Cuts and Jobs Act of 2017 classified qualified improvement property as real property depreciable over 39 years. While Congress intended to correct this with the passage of the Consolidated Appropriations Act of 2019, the correction never came. However, the CARES Act officially changed the classification of qualified improvement property to 15-year depreciable life and eligible for bonus depreciation. Taxpayers may be able to amend their 2018 tax returns in order to take advantage of this technical correction.
Net Operating Loss (“NOL”) Rules. The Tax Cuts and Jobs Act of 2017 changed the Net Operating Loss Rules disallowing carryback of NOL’s arising after 2017 and also limiting the NOL deduction to 80% of taxable income. The CARES Act suspends the change and allows taxpayers to carryback losses at 100% that are generated during 2018, 2019 and 2020 tax years to the 5 previous tax years, and apply for immediate refunds of taxes paid in those years.
Business Interest Limitation. The Tax Cuts and Jobs Act reduced the amount of deductible business interest expense to 30% for certain companies, including those with average gross receipts of $10 million or more. The CARES Act increased the allowable deduction from 30% to 50% of business interest for tax years 2019 and 2020. Furthermore, companies are allowed to choose between using the 2019 or 2020 income for the calculation of deductible interest.
I encourage you to contact your CPA with any questions and concerns regarding how the CARES Act will affect you and your business. We, at Strothman and Company, are here to help and hope you are safe and healthy. Please reach out to let us know how we can best help you and your businesses survive through this pandemic.
Urban Land Institute’s webinar titled: The Federal CARES Act: Implications for the Real Estate Industry