The Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted last month, and it is designed to provide economic relief to both businesses and individuals hit with financial stress and disaster due to the COVID-19 pandemic. For businesses, among the most publicized and popularized provisions, the CARES Act offers loans on borrower friendly terms, it provides cash grants, and it makes available certain federal tax benefits and incentives. For individuals, the CARES Act gave eligible taxpayers cash rebates depending on their filing status and adjusted gross income, and it offers deferment on mortgage payments and student loans. In addition, private businesses such as insurance companies, media companies, and internet providers have stepped up with assisting taxpayers in a time of health and economic crisis.
However, the CARES Act also provides relief in less publicized provisions. Specifically, the CARES Act revised (or, perhaps, corrected), an unintended consequence of the Tax Cut and Jobs Act of 2017 (TCJA) as it relates to the deductibility of interior property improvements made by commercial property owners and tenants. Indeed, while drafting the TCJA, Congress had intended to expand the deductibility of qualified improvement property from fifty percent (50%) to one hundred percent (100%). In other words, commercial property owners and tenants making interior capital improvements could deduct 50% of the cost of such improvements – the TCJA intended to provide for the deductibility of the full cost of such improvements. This deduction had applied to both tenant and owner improvements of commercial properties, including retail shops, office buildings, and restaurants. However, due to drafting error, the precise language relating to such building improvements was left out of the TCJA.
As a result, not only was the 100% deduction was left out of the TCJA, but it even voided the 50% deduction. In place of the 50% deduction, prior law kicked in, and for the past two (2) years, tenants and commercial property owners were instead stuck with a 39-year depreciation period. As a result, owners and tenants did not have much incentive to perform interior commercial improvements.
The CARES Act, however, corrects this drafting error. Now, commercial property owners and tenants can deduct one hundred percent (100%) of their property improvements immediately (there is no longer a depreciation period). In addition, the law is retroactive, allowing businesses to amend prior year’s tax returns to potentially receive a refund.
Not only will this CARES Act revision provide certain businesses with potential refunds during these tough economic times, but it will also incentivize businesses to invest in their properties in the future.
Chris Young is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.