As most of you know, the CARES Act has been all over the news for the past couple of months, primarily as it relates to government stimulus checks and of course the Paycheck Protection Program, the intricacies of which are still being navigated by borrowers and their tax advisors. One of the more important and lesser publicized aspects of the CARES Act however, was the fact that the Qualified Improvement Property “glitch” arising from the Tax Cuts and Jobs Act (TCJA) of 2018 was finally corrected.
Before we get into how this might affect your restaurant, lets take a step back and briefly cover exactly what this glitch was. As part of the TCJA, several different categories of property improvements (restaurant, retail, etc.) were condensed into one overarching classification: Qualified Improvement Property. This was an effort to simplify reporting of these capital expenditures, which include leasehold and tenant improvements, and buildouts of new restaurant space. The intent of the bill was to provide for a 15-year depreciable life for these qualified improvements, with eligibility for 100% bonus depreciation in the year placed in service. To put it simply, most of these big ticket projects would be allowed to be deducted fully in the year they are finished, rather than depreciated over 15 years.
There was just one small problem – the verbiage of the hastily-written bill did not allow for a 15-year useful life, but rather a 39-year life. By default, property subject to a 39-year cost recovery is automatically not eligible for bonus depreciation. As a result, thousands of taxpayers who were expecting to deduct large buildouts in full were now forced to depreciate them not even over 15 years, which would be bad enough, but a full 39 years. Thus, the qualified improvement property “glitch” was born.
Fast forward to 2020 and the CARES Act. After tax advisors had all but given up on this glitch ever being corrected, the CARES Act surprised us all by fixing the glitch, albeit quite under the radar given the global events of the year. Despite missing most of the headlines, this fix can be an extremely valuable opportunity for restaurant owners who opened new locations or incurred significant buildout or remodel costs during the 2018 or 2019 tax years.
Guidance issued by the IRS is allowing taxpayers impacted by the glitch to essentially “catch-up” on any depreciation they missed out on when filing their 2018 returns, and the best part is that you don’t even need to amend your 2018 return to do it. By filing Form 3115 (Change in Accounting Method) with your 2019 business tax return, you can claim all of the depreciation that 100% bonus should have entitled you to in 2018, on your 2019 return. Form 3115 is a daunting eight pages long with significant requirements for various attachments and calculations, but the tax savings can be extraordinary.
For some icing on the cake, the CARES Act also changed the Net Operating Loss carryback rules to allow for NOLs to be carried all the way back to 2013, for a potential refund of taxes paid on your 2013 through 2017 tax returns. So if that big ticket project in 2018 that you now all of a sudden get to deduct in 2019 puts you into a net operating loss position, the opportunity to file a carryback claim could net you some tax dollars back in your pocket – which given the way 2020 has been going, I think everyone would be happy about.
The filings of Form 3115 and any related net operating loss carryback claims are highly complex areas of tax preparation, and are likely to be scrutinized by the IRS. For this reason, we strongly recommend seeking the help of an experienced tax professional if you believe you may be impacted by these issues. Even if you aren’t certain whether this may apply to you, I encourage you to reach out to a Henry+Horne restaurant advisor to make sure you aren’t leaving anything on the table this year.
For more information and resources on COVID-19, see our coronavirus page.
Austin Bradley, CPA