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The CARES Act and Qualified Improvement Property

A provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act has provided a much-anticipated technical amendment regarding “qualified improvement property” (QIP). This provision corrected a flaw in the Tax Cuts and Jobs Act (TCJA) of 2017, and has made QIP eligible for bonus depreciation of 100%, applied retroactively to tax years beginning after December 31, 2017.

Before the passage of the TCJA in 2017, there were several categories of nonresidential real property improvements which were depreciated over a 15-year life, instead of the usual 39-year life for nonresidential real property including qualified leasehold improvements, qualified retail improvement property, and qualified restaurant property. In 2015, Congress added QIP as an additional asset class. At that time, QIP was not given a 15-year depreciable life; instead, it allowed a taxpayer to claim bonus depreciation of 50% in the first year it was placed into service.

QIP is any improvement made to an interior portion of nonresidential real property (residential rental property is specifically excluded), made after the building is first placed in service. Examples of such qualifying improvements include installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical, and plumbing. Excluded from the definition are improvements attributable to internal structural framework, enlargements to the building, and elevators or escalators.

The intent of the TCJA in 2017 was to eliminate all other categories of 15-year depreciated improvement property, and to insert QIP as the only 15-year improvement property. Additionally, Section 168(k) would be amended to allow 100% bonus depreciation (i.e., fully deductible the year the property is placed into service) for any property with a depreciable life of 20 years or less. Although that was the plan, QIP was not included in the definition of 15-year property in Section 168(e)(3)(E) as the result of an apparent drafting error. As a result, QIP was not “qualified property” entitled to 100% bonus depreciation in Section 168(k)(2)(A). When the drafting error became apparent shortly after the TCJA was adopted, IRS concluded that it did not have authority to correct the inadvertent omission. As a result, QIP continued to be treated as 39-year property and ineligible for bonus depreciation.

The technical amendment included in the CARES Act corrects this error by changing the depreciable life of QIP from 39 years to 15 years, which renders QIP eligible for 100% bonus deprecation under IRC 168(k). QIP is therefore 100% deductible in the year the QIP is placed in service.

This CARES Act fix applies retroactively to January 1, 2018, with the following ramifications:

  • Taxpayers who constructed QIP in 2019 and who have not filed their 2019 federal income tax returns can claim the 100% bonus depreciation in their 2019 federal return. The revised initial filing deadline of July 15, 2020, pursuant to Notice 2020-18, should provide many taxpayers with additional time to identify assets and make adjustments. Taxpayers who have already filed their 2019 tax returns treating QIP as 39-year property may amend their 2019 return to claim the bonus depreciation.
  • Taxpayers who constructed QIP in 2018 and who have filed their 2018 tax return treating QIP as 39-year property should consider amending those returns to claim the bonus depreciation. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate net operating losses (NOLs) which can be carried back five years under new NOL provisions also included in the CARES Act. This can be very valuable for tax years prior to 2019 when corporate tax rates were 35%. This is true even though the carryback losses were generated in years when the corporate tax rate was 21%.
  • If the QIP amendment results in an NOL in 2018 or 2019, the IRS has extended the time within which to file an Application for a Tentative Allowance, Form 1045 for individuals and Form 1139 for corporations, for 2018 to June 30, 2020.  The deadline for filing an Application for a Tentative Allowance for a 2019 NOL is December 31, 2020.
  • Alternatively, in lieu of amending their 2018 return, taxpayers may file, with their 2019 return, a Form 3115, Application for Change in Accounting Method, to take advantage of the new favorable treatment and claim the missed depreciation. The Form 3115 would reflect a favorable Section 481(a) adjustment computed as if QIP had been eligible for the 100% bonus depreciation, thereby creating the same benefit as if an amended return had been filed, but in the current year, without the administrative burdens. The determination of whether to amend a 2018 tax return or file an automatic method change in 2019 must be made considering each taxpayer’s individual situation.
  • Expensing is available to taxpayers who have not previously elected out of the interest deduction limitations under section 163(j), which limits interest deductions to 50% of income. Taxpayers may have to re-evaluate any section 163(j) election when considering whether to accelerate depreciation for QIP.
  • With regard to filing amended returns by entities taxed as partnerships, the IRS is allowing partnerships subject to the centralized partnership audit provisions to file an amended partnership return for 2018 or 2019 to take advantage of beneficial tax provisions in the CARES Act. The IRS announced in Notice 2020-23 that such partnerships, which are generally prohibited from filing an amended return, may file an amended partnership return for 2018 or 2019 to take advantage of the CARES Act provisions.
  • Revenue Procedure 2020-25 provides detailed guidance on claiming the missed depreciation now allowed under the CARES Act for 2018, 2019, and 2020.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

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The Families First Coronavirus Response Act - Supplemental Guidance

The Families First Coronavirus Response Act (the “FFCRA”) became effective Wednesday, April 1, 2020.    Please refer to our initial posting on March 20, 2020. Please see our Supplemental Guidance covering the most recent critical changes to the FFCRA contained in the U.S. Department of Labor’s published temporary regulations, including:

  • Definition of “Quarantine or Isolation Order” to determine who is eligible for Emergency Paid Sick Leave
  • Limitation of Emergency Paid Family Leave to care for a child whose school is closed, where there is no other “suitable person” available
  • Six month average calculation to determine “Regular Rate of Pay” for purposes of Emergency Paid Sick Leave and Emergency Paid Family Leave
  • Parameters of the Small Business Exemption

We will continue to closely track the new developments related to the FFCRA. We are here to help.  Please call or e-mail us if you have any questions.

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CARES Act Client Alert

Businesses Need to Act Quickly to Secure CARES Act Cash Flow Relief

On March 27th, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. This Client Alert discusses the major provisions of the CARES Act that may be most relevant to you and your business during these unprecedented times.

The CARES Act is over 880 pages and contains many ambiguities. Further guidance from various governmental agencies is still needed. This Client Alert is based upon the best information available, but recommendations could change based upon future guidance.

Our Recommendations to our Business Clients

  1. If you are considering a Paycheck Protection Program Loan, you should immediately contact your principal lender to begin the application process.

The CARES Act provides up to $349 billion for the Paycheck Protection Program Loan (a “PPP Loan”) to business to be administered by the Small Business Administration in conjunction with local lenders.

If you are considering applying for a Paycheck Protection Program Loan (a “PPP Loan”), you should contact your principal lender immediately to begin the process. Loans will be available on a first-come, first-served basis and demand is expected to be very high. Time is of the essence to obtain these loans. The amount available for lending under this program could be depleted quickly.

PPP Loans do not require collateral or personal guarantees, and interest rates cannot exceed 4.0% per annum. All or a portion of this loan may be forgivable. Loan proceeds may be used for eligible payroll expenses, rent, benefits, and utilities during the period from February 15, 2020 through June 30, 2020.

Any company that employs no more than 500 employees, was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor, may be eligible for the PPP Loan program. Eligibility is determined by your lender.

The maximum loan amount available will be equal to: (i) the average total monthly payments by the borrower for specified payroll costs incurred during the one-year period before the date on which the loan is made, multiplied by (ii) 2.5, subject to a cap of $10,000,000.

Significantly, the CARES Act provides that PPP Loans are eligible for loan forgiveness equal to the amount spent by the borrower during the eight-week period following loan origination on: (i) rent, (ii) payroll costs (as defined above), (iii) interest on a mortgage, and (iv) utility payments. The amount forgiven may not exceed the principal of the loan. This loan forgiveness effectively makes eligible amounts a grant of free money to your business.

If you do not have a current lender or do not have one that is participating in the PPP Loan program, contact us so that we may provide a referral to SBA lenders in the program.

  1. Consider taking advantage of the ability to delay payment of employer share of social security tax.

The Cares Act allows employers to defer payment of the employer share (6.2%) of the social security tax it would otherwise be responsible for paying in 2020, effective for payments due after March 27, 2020. Fifty percent of the deferred payroll taxes are due on December 31, 2021, and the remaining amounts are due on December 31, 2022. No interest or penalties would apply.

Making use of the deferral may help you to conserve cash flow in the near term.

If PPP loan forgiveness occurs, the ability to defer ceases. If you obtain a PPP loan and that loan is forgiven under the CARES Act, the deferred taxes would need to be paid quickly.

  1. Consider taking advantage of the employee retention payroll tax credit.

The CARES Act provides eligible employers with a refundable credit against payroll tax (Social Security and Railroad Retirement) liability equal to 50% of the first $10,000 in wages per employee (including the value of health plan benefits) which results in a possible $5,000 per employee employment tax credit.

This credit is available for businesses whose operations were fully or partially suspended due to the COVID-19 pandemic. To date, it is uncertain whether the Governor’s shelter in place order or other county orders would allow you to qualify for this credit. We are awaiting further guidance.

The credit is for “qualified wages.” For employers with 100 or fewer full-time employees, all employee wages would qualify for the credit. The credit is capped at the first $10,000 of compensation, including health benefits, paid to the employee. The provision is effective for wages paid or incurred from March 13, 2020 through December 31, 2020.

This credit would be unavailable if you obtain a Paycheck Protection Program loan. Any credits taken would need to be repaid promptly following receipt of loan proceeds.

  1. Carefully consider whether to implement reductions in employee headcount, hours, or compensation in light of potential resources under the CARES Act.

The decision as to whether to make any modification to existing employment arrangements is a very serious one and can only be made after considering a number of factors, of which the provisions of the CARES Act is only one. Factors such as projections of future revenue, productivity, the loss of key employees, the cost of layoffs, furloughs, or terminations and cash flow are likely of significantly more importance than the provisions of the CARES Act in analyzing potential changes to your workforce. But please note that a reduction in the number of employees or the compensation paid to employees would have a direct impact on the dollar amount of the forgiveness of the PPP Loan that you may be able to obtain.

  1. Families First Coronavirus Response Act (“FFCRA”) Emergency Leave Tax Credits.

IF EMERGENCY SICK LEAVE APPLIES TO CALIFORNIA EMPLOYERS, IT APPLIES EFFECTIVE WEDNESDAY, APRIL 1. HENCE IMMEDIATE ATTENTION IS REQUIRED.

The FFCRA provides certain tax credits to offset private employers’ cost of paying emergency sick leave wages, which are capped at either $511 or $200 per day, depending upon why emergency sick leave is available, for eighty (80) hours or ten (10) days. For payments made after April 1, an employer would be eligible for a tax credit toward Social Security taxes equal to 100% of emergency sick leave paid pursuant to the FFCRA.

It is not clear whether the California state-wide stay-at-home order or applicable county orders would satisfy the requirements to receive the tax credits. If so, the payment of emergency sick leave to employees who have been furloughed because they cannot come to work or work remotely will subject to a dollar-for-dollar employment tax credit. If not, there will be no credit. IRS guidance is expected soon.

If you are required to pay emergency sick leave wages, you can reduce the amount of your federal tax deposits, starting for the first deposit that includes emergency sick leave wages, by the emergency sick leave wages paid. If the credit exceeds the federal tax deposit due, you should file a request for an accelerated refund. IRS stated it will process accelerated refund requests within two weeks or less. You should treat the timing as aspirational.

In addition, private employers will be eligible for a further credit toward Social Security taxes for emergency paid family leave wages paid under the Act for payments made after April 1. This credit is capped at $200 per day, up to an aggregate of $10,000. Family leave is available to care for the employee’s child under age 18 whose school or child care provider has been closed or is unavailable due to COVID-19.

  1. Use Net Operating Income Carryback to benefit businesses now.

The CARES Act expands and accelerates the use of net operating losses (“NOL”) for businesses by allowing NOL carrybacks to apply to 100% of the prior year income. The provision allows for an NOL arising in 2018, 2019, or this year, to be carried back five years.

Businesses with taxable income in the prior five years and an NOL in 2018 or 2019 will benefit from filing amended return carrying back a 2018 NOL and by filing a Request for Tentative Allowance (Form 1045 for individuals and Form 1139 for corporations), to obtain a tentative allowance or “quick refund” in 90 days for a 2019 NOL carryback. These changes will allow companies to convert currently unusable losses to cash in as little as 90 days.

_______________

The CARES Act is a major, broad, sweeping, and complicated relief package for those affected by the COVID-19 crisis. Like any complicated emergency relief package adopted quickly, there are ambiguities, inconsistencies, and many limitations applicable to the relief provided by the CARES Act. Although swift actions should be taken, it is equally important to carefully analyze your individual circumstances with your accountants, tax or other financial advisors, and attorneys.

Boutin Jones lawyers are here to help you navigate the opportunities presented by the CARES Act. The contact information for our CARES Act Team is:

Jim Leet:                     jleet@boutinjones.com

Dennis Michaels:      dmichaels@boutinjones.com

Iain Mickle:                imickle@boutinjones.com

Bob Rubin:                 brubin@boutinjones.com

 

Legal disclaimer: The information in this client alert (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

 

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The Families First Coronavirus Response Act

The Families First Coronavirus Response Act (the “Act”) was enacted on March 18, 2020. This Act extends emergency family leave and emergency paid sick leave to many employers and employees.  While no effective date has yet been established, the Act will take effect no later than April 2, 2020.  It will expire on December 31, 2020. We have prepared a Guidance to this Act to help you understand its impact on your business operations. If you have any questions, please contact us.  We wish you and your families all the best during this time.

 

Families First Coronavirus Supplemental Guidance 4-7-2020

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Continuing to Serve Our Clients

Adaptive Work – Continued Service

In response to the challenges posed by the COVID-19 pandemic, Boutin Jones has implemented a comprehensive business continuity plan that provides uninterrupted legal services by our attorneys across all of our practice groups. We are complying with the directive issued March 17 by Sacramento County to have employees perform all non-essential duties remotely.

Contacting Us

There is no change to the phone or email methods of communication that you currently use to reach us. We are open for business and will strive to continue providing the highest quality legal services to you.

Our daily lives are dramatically changing due to this public health crisis. As always, we are here to help if you need assistance. We wish you the best during this challenging time and thank you for your continued trust in Boutin Jones.

 

 

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Former Attorney for the Office of Chief Counsel, IRS, Matt Carlson, Joins Boutin Jones' Growing Tax Practice

Matt Carlson has joined Boutin Jones Inc. to assist businesses and individuals on tax issues. Matt has over ten years of tax controversy experience and was previously an attorney for the Office of Chief Counsel, IRS, where he represented the IRS in federal, state and local tax proceedings. Since moving to private practice, Matt has focused on tax controversy, as well as advising clients on a range of federal, state and local tax matters related to tax planning and transactions with sensitive issues.

He joins the region’s largest tax practice of eight attorneys who handle all types of federal, state and local tax issues including income, estate and gift, property, sales and use, documentary transfer, excise, and transient occupancy taxes, to name a few.

Matt is an active leader for a number of tax law groups. He is currently the Chair for the Income and Other Taxes Committee of the Taxation Section of the California Lawyers Association. He is also the Chair of the Tax Law Section of the Sacramento County Bar, and Co-Founder and Former Chair of the CalCPA SALT Committee.

He is a sought-after speaker on a variety of tax-related topics and within the past year has spoken at over six seminars addressing topics such as Qualified Opportunity Zones and a wide variety of federal and state tax controversy issues.

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Visit Our New Real Estate Portfolio

Boutin Jones’ real estate team represents clients with real estate projects in California and throughout the United States.

 

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2020 Employment Law Year-in-Review

Boutin Jones Inc. is hosting its annual Employment Law Year-in-Review lunch seminar. Employment attorneys Julia Jenness, Bruce Timm, Jim McNairy, Kimberly Lucia, and Lissa Oshei will lead an informative and lively discussion of recent key changes in the law.

Thursday, January 23, 2020
11:30 a.m. – 1:30 p.m.
KVIE Public Television
2030 W. El Camino Avenue
Sacramento, CA 95833

Topics will include the following:

  • New legislation regarding the independent contractor classification (AB 5)
  • New restrictions on the use of arbitration agreements
  • “No rehire” provisions in settlement agreements
  • The California Consumer Privacy Act
  • Clarification of sexual harassment training requirements and updates to the Fair Employment and Housing Act
  • Other important 2019 legal developments

Please RSVP to Gil Castro at (916) 321-4444
Lunch will be provided

2020 Employment Law Year-in-Review

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Boutin Jones Launches California Litigation Notebook

Running a business is hard, and avoiding problems can be even more challenging. What doesn’t have to be difficult is finding info on new legal developments that impact your business. We’ve compiled lots of helpful information, addressed notable new court decisions, provided monthly “litigation tips,” and put it all on our new blog, California Litigation Notebook. You can find it under Insights on the menu bar, get to it from the Litigation Practice page on our website, or go straight to www.californialitigationnotebook.com.

Stay tuned.  Our employment law blog, California Employment Law Notebook, will soon go live.

Become a subscriber to receive an update anytime a new blog is published. Thanks for checking it out!

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Estate Planning, Probate, Trust Administration and Tax Law Attorney Alexander Crawford Joins Boutin Jones Inc.

Attorney Alexander Crawford has joined Boutin Jones where he will practice Estate Planning, Probate, Trust Administration and Tax Law. A graduate of the University of California, Davis, School of Law, Alex was a Judicial Extern for Chief Judge Ronald H. Sargis, United States Bankruptcy Court for the Eastern District of California. Prior to law school, he received a B.A. from Vassar College. He is a member of the CFA Society of Sacramento (Chartered Financial Analyst) and received Witkin Awards for Academic Excellence for the Highest Grade in five courses including Trusts, Wills and Estates.

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Boutin Jones Inc. Welcomes New Litigation Attorney Ian McGlone

Boutin Jones welcomes Ian McGlone as a new attorney in their litigation group. Ian was a Judicial Clerk for the Hon. Kendall J. Newman and the Hon. Carolyn K. Delaney of the U.S. District Court, Eastern District of California and a Judicial Clerk for the Honorable Consuelo M. Callahan, U.S. Court of Appeals for the Ninth Circuit, as well as Valedictorian of his law school class. He will represent Boutin clients in complex civil litigation matters.  He is a graduate of the University of Pacific, McGeorge School of Law and Bethany College.