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Over the past few months, construction companies and contractors have been focused on maintaining financial vitality as market conditions and government regulations change. Much attention has centered on the Paycheck Protection Program (PPP) and other funding options available through the Small Business Administration. In fact, it was reported on August 8 that over $65B of PPP loans were made to construction companies. A stunning number that shows just how deep the pandemic has affected the industry. The heightened focus on funding has put tax planning on the back burner for many. While it may appear to be a secondary concern, several new tax incentives allow companies to claim losses, enhance capital purchases, and receive reimbursement for sick leave and certain payroll costs. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key tax opportunities below.
Net Operating Loss Carryback Rules
One of the most beneficial elements of the CARES Act was the changes to Net Operating Loss (NOL) carryback rules. NOL is not a new tax strategy; the ability to use current year losses to offset gains in another year has been a useful tax planning tool for many years. However, NOL opportunities were significantly limited by changes made in the Tax Cuts and Jobs Act. It restricted the use of NOL to a lookback period of two years and a limit of 80 percent of adjusted taxable income, with a 20-year carryforward. The CARES Act changed these restrictions to allow a carryback of current year losses for up to five years. This means that construction companies experiencing losses in 2020 can carry them back as far as 2015; the same applies to losses in 2018 or 2019. Further, the CARES Act temporarily allowed businesses to claim up to 100 percent of adjusted taxable income.
A more immediate refund may be available by filing amended returns for 2018 or 2019 now. The time and expense to do so could be worth it since it could generate significant refunds for more than one year. Companies will need to check whether any of the lookback years were also subject to foreign earned income, and if so, they can exclude those years from NOL.
Section 179 Deduction and Bonus Depreciation
Though not related to the CARES Act, the Section 179 deduction has been a popular tax strategy for years. It allows businesses to recoup some or all of the costs of capital expenses through a tax deduction. New or used equipment purchases and software generally qualify. In 2020, the deduction limit is $1,040,000 and the spending cap is between $2,590,000 and $3,630,000, after which point Section 179 no longer applies.
Bonus depreciation, which can be used after the Section 179 limit is reached, essentially enables the opportunity to write off the full purchase price of new and used equipment. In 2020, bonus depreciation is 100 percent. In addition, the CARES Act fixed a known error in the tax code that disallowed interior building improvements from taking bonus depreciation. The error, known as Qualified Improvement Property (QIP), viewed interior building improvements as 39-year property instead of 15 years. The change was made retroactive to 2018 and 2019, so amending prior year returns can also offer another source of additional cash flow.
COVID-19 Tax Opportunities
Legislation related to COVID-19 created more ways to save through tax credits and tax deferrals. First, all businesses can delay depositing 50 percent of their payroll taxes for 2020 until December 31, 2021, and December 31, 2022. Also, there are two tax credits available for construction companies impacted by COVID-19.
One is a tax credit to reimburse the employer for paid leave when a worker is off sick due to coronavirus. This is through the Families First Coronavirus Response Act and can be used in conjunction with PPP loan funds. The other is a tax credit for maintaining payroll, called the Employee Retention Credit. Both tax credits can be claimed on quarterly tax filings. It is important to note that the Employee Retention Credit cannot be used at the same time as PPP loan funds, unlike the paid leave credit.
There are several valuable tax credits, deductions, and incentives that will expire at the end of 2020. Although Congress has been debating another Coronavirus relief package, which is sure to include additional tax incentives, it is unclear when and if legislation will be passed. Now is the time to review your situation to determine what steps can be taken to optimize your position. If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9893, or click here to contact us. We look forward to speaking with you soon.