2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

This Year in Review

Qualified improvement property is defined as improvements made by a taxpayer to the interior portion of nonresidential real property that are placed in service after the building was first placed in service. It excludes costs for enlargement of the building, elevators and escalators, or work to the building’s internal structural framework. The CARES Act changes created a number of planning issues with respect to 2018 and 2019 returns. If 39-year depreciation was taken on eligible QIP placed into service in either year, there is an opportunity to claim refunds to benefit from the change in law. The IRS issued procedures rules for making such claims. Business Interest Expense Limitation A change to the interest expense limitation rules pursuant to Section 163(j) was enacted by the TCJA. Under the new rules, every business, regardless of form, is subject to a disallowance of the deduction for net interest expenses (i.e., business interest expense in excess of business interest income) exceeding the sum of (i) certain floor plan financing interest, plus (ii) 30% of adjusted taxable income (ATI). For years beginning before January 1, 2022, adjusted taxable income is business taxable income without considering the deductions for depreciation, amortization, or depletion. The law contains several exceptions: 1. A small business exception excludes from this limitation a business whose average gross receipts do not exceed $25 million ($26 million for 2019 and 2020). In making this determination, the gross receipts of certain commonly controlled businesses must be aggregated. 2. Certain businesses can elect out of this interest limitation. They include electing real property trades or businesses (ERPTB) or electing farming trades or businesses (EFTB). The cost of this election is that the business is required to use the Alternate Depreciation System (ADS) instead of the normal cost recovery rules for certain property. ADS requires the use of longer lives and the straight-line method. Of greater significance, those required to use ADS cannot take bonus depreciation on the affected assets.

3. Certain floor plan interest is excluded from this rule. 4. Certain regulated public utilities and electric cooperatives are not subject to this rule. The CARES Act made a number of changes to these rules for 2019 and 2020 involving the ATI limit. First, the limit is increased from 30% to 50% of ATI. This increase is elective with respect to either year or both years, which allows some flexibility to use the expense in a higher tax bracket year if business interest expense would be limited. However, the 50% ATI limit does not apply to entities taxed as partnerships for their 2019 tax year. It only applies to the 2020 tax year. Instead, the new law creates a more complex regime. If the partnership allocated to a partner any Excess Business Interest Expense (i.e., business interest expense which cannot be deducted due to these limits) for 2019, the partner must carry this amount forward to 2020, but is able to use 50% of the carryover in that year without being subject to the Section 163(j) limits. However, the other 50% of the carryover is subject to the normal partner rules imposed on Excess Business Interest Expense. Secondly, Congress recognized that incomes are likely to be lower in 2020 compared to 2019 due to the economic impact of the pandemic. The law allows a taxpayer to elect to use 2019 ATI instead of 2020 ATI in computing the section 163(j) limitation. Corporate Charitable Contributions The CARES Act increased the ability of C corporations to deduct charitable contributions for 2020. Normally, charitable contributions are limited to 10% of a corporation’s taxable income. This limit is increased to 25% of taxable income for 2020. Additionally, the limitation on the deduction for the contribution of food inventory based on value is ordinarily limited to 15% of net income. For 2020, this has been increased to 25%.