2020 Year-End Tax Guide

39

www.marcumllp.com

Contractors, COVID and the CARES Act: What You Need to Know

In late 2017 Congress signed into law the Tax Cuts and Jobs Act (TCJA), which significantly changed the accounting and tax planning landscape for contractors and construction companies. Much like having to retrofit a 100-year- old building to meet today’s stringent building and safety codes, accounting professionals had to look at each project from new angles to determine how best to redesign their client’s tax and accounting framework. Fast forward to 2020, and the world’s foundation starts to crumble. Part of the government’s response was the signing into law of the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act on March 25, 2020. Among other things, it included many technical corrections to items enacted in TCJA which can provide significant benefits to contractors, construction companies, and real estate professionals.

QUALIFIED IMPROVEMENT PROPERTY

When the TCJA was signed into law, an oversight by the IRS removed an important aspect of the code known as qualified leasehold improvement property. As a result, improvements were required to be depreciated over 39 years as opposed to current expensing. The CARES Act rectified this by creating a new property class known as Qualified Improvement Property. If an improvement meets the definition of qualified improvement property, it is eligible to be depreciated over a 15-year period and qualifies for 100% bonus depreciation in the year placed in service. This rule is retroactive to property placed in service after December 31, 2017. There may be significant opportunities for taxpayers to amend prior year returns for 2018 and 2019 and accelerate depreciation on large expenditures. For example: Let’s say a contractor spends $50,000 to renovate the interior of an existing office space. Under TCJA, the company would only be able to deduct $1,282 per year and would take this same depreciation deduction for the following 38 years. The contractor may never see the full tax benefit of the expenditure. Under the CARES Act, the contractor could deduct $50,000 in the year the renovations are made, recognizing the full tax benefit immediately. To meet the definition of qualified improvement property, the property /improvement must be: 1. Made to an interior portion of a nonresidential building; 2. Performed after the building is already in service;

3. Made by the taxpayer (property owner); and 4. Placed in service after December 31, 2017.

Of course, the tax code is never this simple, and it is best to discuss improvements with your tax specialist to see if expenditures meet this new rule.