Net Operating Losses & QIP Depreciation

Methods

April 21, 2020

Presenters:Lisa Yamakawa, Partner

Shawn Kato, PartnerJustin Demere, Partner

Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided "as is," with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

Introduction & Housekeeping

Lisa YamakawaPartner, Tax Services

Shawn KatoPartner, Tax Services

Justin DemerePartner, Tax Services

Presenters

• Submit questions via Q&A feature

• Slides & Recording will be available by Wednesday

Housekeeping

Net Operating

Losses (Corporate/Individual)

Lisa Yamakawa, PartnerShawn Kato, Partner

Modifications of Net Operating LossesOverview of Provisions

• 5 Year Carryback of NOLs for years beginning after December 31, 2017 and before January 1, 2021.

• Suspends the 80% limitation on NOLs arising in years beginning after December 31, 2017 and used in years beginning before January 1, 2021.

• Clarifies the calculation of the 80% limitation for years beginning after December 31, 2020.

• Taxable Income is defined as income AFTER the use of pre-2018 NOLs and BEFORE the deductions for 199A (QBI) and 250 (GILTI & FDII)

• Technical correction for fiscal years beginning in 2017 and ending in 2018, which allows for a 2 year carryback and 20 year carryforward.

• Election out of a carryback is permitted

• Special provisions for REITs and insurance companies

• Special rules for carrybacks to Section 965 inclusion years:• Taxpayer is deemed to have made a 965(n) election to waive the use of the NOL against

the transition tax inclusion• Election available to skip over 965 inclusion years in the carryback period

• Can be used to offset NOLs at a higher tax rate in pre-TCJA years (up to 35%)

Modifications for Net Operating LossesCorporate NOL Carrybacks

Modification for Net Operating Losses

• Temporary suspension of excess business loss rules for 2018, 2019, 2020.• Losses previously limited to $250,000 ($500,000 MFJ)• If you had a business loss that was limited in 2018 or 2019 under the EBL

rules, you may be able to obtain a refund by filing an amended tax return.

• Reinstatement of NOL carrybacks generated in tax years beginning 2018 through 2020.

• NOL carrybacks can result in an immediate refund of tax paid in prior years • In addition to securing an immediate refund, NOL carrybacks present an

opportunity to secure permanent tax savings by using losses to offset income generated prior to the tax return when the tax rates were higher.

• Suspension of 80% taxable income limitation through the 2020 tax year.

• Election out of carryback permitted.

Individual NOL CARES Act Changes

Modification for Net Operating Losses

• Accelerate deductions and defer income to maximize the amount of the NOL you can carry back.

• Consider accounting method changes to increase NOLs in 2019/2020.

• Changes to interest deduction limitations from 30% to 50% of ATI and/or QIP deductions may increase NOLs in 2019 & 2020.

• Consider consequences of carrying back losses to earlier years, which could affect calculations in the carryback years that are based on taxable income limitations (i.e. business interest, GILTI/FDII, 199A QBI deductions, charitable contributions).

Planning Tips & Other Considerations

Forms & Instructions• Corporations – Form 1139, Corporation Application for Tentative Refund• All Others – Form 1045, Application for Tentative Refund• Per IRS FAQ, these can now be temporarily faxed instead of paper filed• Exceptions – require the filing of an amended return

IRS Notice 2020-26 - Extension of Time for Filing of Tentative Refund Claims• This Notice provides an extension for NOL tentative refund carryback claims (Forms

1045 & 1139) relating to years beginning during calendar year 2018 and ending before June 30, 2019 by six months for a total of 18 months from the end of the tax year. Calendar 2018 NOLs – due date is June 30, 2020

Rev. Proc. 2020-24 - Election Procedures for NOLs • Procedures for how to waive the carryback for NOLs from 2018-2020• Procedures for how to elect to exclude 965 inclusion years from the carryback• Due date for carryback of fiscal 2017 carryback claims and any carryback elections

related to this year – July 27, 2020

Modifications for Net Operating LossesGuidance on Procedures & Due Dates

QualifiedImprovement

Properties

Justin Demere, Partner

Technical Amendments Regarding Qualified Improvement Property What is Qualified Improvement Property (“QIP”):• Improvement made by the taxpayer • To the interior of a non-residential building • That is placed in service after the date the building was first placed in

service. • Some improvements are excluded. Excluded improvements include:

• The expansion of a building (enlargement)• Elevators or escalators• Internal structural framework of the building

• Mixed-use property - if more than 20% of the building’s gross rental income is from leasing commercial spaces, the entire building is treated as non-residential property for depreciation purposes.

• Some Examples:• Tenant Improvements• Interior Finishes – tile, drywall, painting, concrete sealing• Mechanical and Plumbing - bathroom fixtures, water heaters, piping, interior HVAC• Electrical – lighting, panels

Technical Amendments Regarding Qualified Improvement Property

The CARES Act fixes the so-called “retail glitch” as it relates to Qualified Improvement Property (“QIP”). • Previous to the “fix,” QIP was depreciable over 39 years (40 years

for ADS) and not eligible for bonus depreciation• QIP now has a 15-year depreciable life and is eligible for 100%

bonus depreciation.• QIP now has a 20-year depreciable life for purposes of the

Alternative Depreciation System (“ADS”).• Provision is retroactive to enactment of TCJA which is effective for

assets placed in service after 2017.

Note - any “electing real property trade or business”—i.e., a real property trade or business that has elected out of the interest limitation provisions of section 163(j)—is required to use ADS for QIP and thus cannot claim bonus depreciation on QIP.

• Given changes to both regular and ADS lives, QIP placed in service on a 2018 return (and 2019 return, if filed) needs to be “fixed.”

• CA does not conform to QIP rules. 39 year nonresidential property.

Options to Take Advantage of the QIP Change

The ability to immediately expense Qualified Improvement Property can provide tax savings of up to $400k per $1M of property placed in service• There is significant flexibility to take advantage of the QIP change• Amend 2018

• Certain (many) partnerships are restricted from amending returns under the centralized partnership audit regime (“CPAR”), however the IRS has issued procedures that allow these partnerships to amend returns if filed prior to September 30, 2020

• Change QIP depreciation methods by filing an automatic accounting method change (Form 3115) to include the “catch-up” depreciation

• Ability to make late elections or revoke elections related to depreciation

• Parlay with other provisions of the CARES Act• In order to capture the greatest benefit, an analysis should

be completed to identify the most optimal path.

Electing Real Property Trade or Business

Any Electing Real Property Trade or Business (“ERPTB”) is required to use ADS for QIP and thus cannot claim bonus depreciation on QIP:• Rev Proc 2020-22 allows for the withdrawal of the ERPTB Election which treats the

Taxpayer as if it had never made the election• Taxpayers must file an amended Form 1065 or Administrative Adjustment Request

(“AAR”) prior to October 15, 2021• ERPTB Election can be withdrawn in 2018/2019 and made in a subsequent year• Late election allowed on 2018-2020 return if made by October 15, 2021. Note: late

election allowed even for taxpayers that withdraw the election• Similar to the previous slide, there is flexibility in determining the most optimal path • Opportunity for numerical analysis/forecasting in order to quantify the benefits of a

trade-off of depreciation for interest expense

Q&A

Contact InformationIn addition to your Squar Milner Tax Advisor, please contact the following professionals with any additional questions or if you wish to discuss further:

Lisa YamakawaPartner, Tax Serviceslyamakawa@squarmilner.com

Shawn KatoPartner, Tax Servicesskato@squarmilner.com

Justin DemerePartner, Tax Servicesjdemere@squarmilner.com

IRS 230 Circular DisclosureTo comply with the requirements imposed by the Department of the Treasury and current Internal Revenue Service rules and standards, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of (i) avoiding penalties that may be imposed on the taxpayer, and (ii) supporting the promotion or marketing of any transactions or matters addressed herein. If this communication (or any attachments) is provided in any manner to a party other than the intended recipient taxpayer, that party cannot use or rely upon any advice and should seek advice based on his or her own particular circumstances from an independent tax advisor.