Additional COVID-19 Relief for the Real Estate Industry
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law earlier this year, provided multiple forms of economic relief for the real estate industry in the midst of the COVID-19 pandemic. The IRS has recently announced updates to this legislation, as well as updates to real estate-friendly legislation included in 2017’s Tax Cuts and Jobs Act (TCJA). These updates bode well for developers, owners, and managers alike and should be considered when looking for ways to maximize tax benefits.
Payroll Tax Provisions
The IRS released an updated Form 941 which incorporates all new COVID-19-related employment tax credits and other relief created under the CARES Act, such as paid leave credits, employee retention credits, and deferral of social security taxes.
The instructions for the updated Form 941 outline the changes to the form and include a summary of several COVID-19-related credits, including the Employee Retention Credit.
Businesses that did not receive a Paycheck Protection Program (PPP) loan should revisit whether they are eligible for the Employee Retention Credit, which is equal to 50% of qualified wages paid after March 12, 2020. Employers eligible for this credit include employers engaged in a trade or business that at least partially suspended operations due to orders from a governmental authority due to COVID-19 or experienced a significant decline in gross receipts during a calendar quarter.
Employers can find a list of 94 questions and answers on the IRS website that provide more guidance.
Qualified Business Income
The TCJA created a 20% Qualified Business Income (QBI) deduction for sole proprietorships, partnerships, limited liability companies, and S corporations under Internal Revenue Code Section 199A. On June 25, 2020, the IRS issued updated final regulations on this deduction offering guidance on how to treat previously disallowed losses.
Previously disallowed losses carried over from taxable years ending on or after Jan. 1, 2018, are generally included in the computation of QBI in the year that those losses are included in determining taxable income. Note that previously disallowed losses incurred before taxable years ending Jan. 1, 2018, are not included in computing QBI, even if included in taxable income.
Losses incurred in taxable years beginning on or after Jan. 1, 2018, will be used for purposes of computing QBI in order from the oldest to the most recent on a first-in, first-out (FIFO) basis and are treated as losses from a separate trade or business. It is necessary for the FIFO rule to be applied on an annual basis by category (i.e., passive losses, at-risk losses, excess business losses, losses in excess of basis, etc.). The updated regulations do not specifically address ordering rules with respect to current year losses when there are prior year losses being carried into the year. Without any further guidance, we believe it is reasonable to assume the current year losses take their place behind prior year losses pursuant to the FIFO ordering convention.
The category and attributes of the disallowed loss are determined in the year the loss is incurred. An important attribute to consider is whether the loss is attributable to a qualified trade or business or a specified service trade or business (SSTB). If the loss is attributable to a SSTB, phase-in rules apply:
- If an individual’s taxable income is at or below the threshold amount in the year the loss is incurred, the entire disallowed loss is treated as QBI from a separate trade or business in the year the loss is allowed.
- If the individual’s taxable income is within the phase-in range, then the applicable percentage of the disallowed loss is taken into account in the year the loss is allowed.
- If the individual’s taxable income is higher than the phase-in range, then none of the disallowed loss will be included in QBI in the year the loss is allowed.
These final regulations apply to tax years beginning after Aug. 24, 2020.
With these new tax benefits comes great complexity. We encourage you to reach out to your KSM advisor to discuss how these updates can benefit your real estate business.
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