CBRE has expanded its corporate advisory team with theaddition of Anya Ostry. Ostryjoins the firm as first VP and aspart of a 14-member team tofocus on corporate occupiers.
The Tax Provisions inthe CARES Act Can AlsoMaximize Cash Flow
The situation was different in theGreat Recession. In 2008, borrowers stillhad cash, but they were fighting to holdonto their assets. “They would fight youfor two, three or four years in foreclosure and bankruptcy to try and holdonto that asset because it was their lifeline,” Freedman says.
This time through, Freedman expectsborrowers to try to work with lenders to
Although the economic stimulus provi- sions such as the small business loansand payroll tax deferrals of the CoronavirusAid, Relief, and Economic Security Acthave received much of the publicity, thereare significant tax provisions that couldhave an almost immediate cash flowimpact on commercial real estate entities.As is the case with any tax law that comestogether in a matter of days (or evenhours), there are often questions, andfurther guidance is needed. Despite theInternal Revenue Service’s recent guidance , questions remain. Owners andinvestors, as well as REITs, are well advisedto quickly take appropriate steps to obtainrefunds, as many of the CARES Act provisions directly impact their businesses.
Interest Limitation and BonusDepreciation
The 2017 Tax Cuts and Jobs Act createdsignificant limitations on how much interest a business could deduct on money itborrows. For taxable years starting onJanuary 1, 2018, and later, the limitationon deduction of interest expense for business entities is 30% of adjusted taxableincome. ATI, a term defined in theInternal Revenue Code, is similar toEBITDA, which is used in financial reporting. One major exception to the interestlimitation is provided for real propertytrades or businesses that were allowed toelect out of the limitation.
The one downside to electing out is that
a RPTOB is required to depreciate real
estate assets over a longer period under the
alternative depreciation system. However,
this “penalty” isn’t so onerous because real
estate assets would have to be depreciated
over 40 years instead of the 39 years man-
dated under the general depreciation rules.
But there was a drafting glitch in theTCJA which caused nonresidential building improvements to be depreciated over
39 years instead of the 15 years under priorlaw. This also resulted in QIP no longerbeing eligible for bonus depreciation,which would normally result in a completewrite-off of QIP acquired in a year. Notethat QIP property is defined as any improvement made by the taxpayer to an interiorportion of a building which is nonresidential real property. Such improvements donot include the enlargement of a building,any elevator or escalator work, or the internal structural framework of the building.
As a result, a RPTOB subject to the
interest limitation had little downside to
electing out of the rules. By opting out of
the election, a RPTOB would be eligible to
fully deduct interest on its borrowings,
and the only cost would be to depreciate
QIP over 40 years instead of 39 years.
For 2019 and 2020 tax years, the CARESAct increases the interest limitation to50% of ATI for corporations and individuals. Although this change is not retroactive to 2018, if a taxpayer were nolonger subject to the interest limitationwhen using 50% of ATI as the cap for2019 and 2020, perhaps the taxpayerwould not have made the RPTOB election in 2018.
In addition, the CARES Act redesignated QIP property to 15-year property,which makes it eligible for 100% bonusdepreciation. This change is retroactive toJanuary 1, 2018, and herein lies the rub:Property owners and investors that madethe “irrevocable” RPTOB election in 2018may have been better off not making theelection, instead, taking 100% bonusdepreciation on QIP and being limited onthe interest expense deduction, becausethe additional bonus depreciation
By Stephen Bertonaschi and Scott Drago
get the latitude and the runway to hire
people. “They need money for leasing
commissions and improvement dollars
for the next tenant, which is going to be
at a lower rent,” Freedman says.
The good news is today, unlike in2008 and 2009, lenders are in bettershape, according to Freedman. Andthere is money out there that can bedeployed.