Submitted by KSM

The real estate industry entered 2020 with full momentum and high expectations. Since COVID-19 has come onto the scene, the pendulum has swung in the opposite direction. What developers, investors, and managers do now to mitigate risk and limit damages is critical.

The federal government has launched various loan programs and tax provisions designed to provide economic relief during this crisis, many of which are advantageous for the real estate industry.

SBA Loans

Two Small Business Administration (SBA) loan programs are available to businesses that qualify based on their number of employees or gross receipts.

• Paycheck Protection Program (PPP): This program provides loans to help employers cover payroll costs as well as rent, mortgage interest, and utilities. The maximum loan amount is 2.5 times the borrower’s average total monthly payroll costs, not to exceed $10 million. If certain criteria are met related to maintaining a number of employees and the amount of wages paid to those employees, the loan can be partially or even fully forgiven, with no taxable income recognized for the amount of forgiveness. Eligible businesses can apply for the PPP loan through an SBA-authorized lender.
• Economic Industry Disaster Loan (EIDL): This loan is available to businesses in amounts up to $2 million. A business qualifies by showing a financial impact or loss directly related to COVID-19. These loans can be used to pay fixed debts, payroll, accounts payable and other bills that otherwise could not be paid due to COVID-19. Unlike the PPP, the EIDL is applied for directly via the SBA website, and the application includes an opportunity to get a $10,000 advance within just a few days.

A business can receive a loan under both of the programs above as long as it utilizes the proceeds for different expenses.

CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes a variety of tax provisions that can provide favorable results for real estate companies, including:

• Limitation of Business Interest Expense, Section 163(j): The adjusted taxable income limitation is increased from 30% to 50% for 2019 and 2020, which will result in less interest expense being suspended for many taxpayers. The 30% limitation is still in place for partnerships for 2019, but additional provisions in the CARES Act allow partners in those entities a greater deduction of previously suspended interest on their 2020 returns.
• Qualified Improvement Property (QIP): The CARES Act fixes the technical error in the Tax Cuts and Jobs Act of 2017 (TCJA) and, as a result, QIP is now eligible for 100% bonus depreciation. QIP includes most improvements to the interior of a non-residential building made after the property was first placed in service, such as tenant improvements. This change applies retroactively and, pending additional procedural guidance from the IRS, will generate much larger depreciation deductions on either 2018 amended returns or 2019 returns. With these improvements now eligible for bonus depreciation, there could be a tremendous increase in the net present value of conducting a cost segregation study.
• Net Operating Losses (NOLs): The TCJA eliminated the carryback nature of NOLs starting in 2018 and limited the carryforward use of the NOL to 80% of a future year’s income. The CARES Act brings the old rules back into play. NOLs arising in tax years 2018, 2019, and 2020 can be carried back five years, and the 80% limitation is suspended until tax years beginning after 2020. The availability of the NOL carryback coupled with the changes above that could create additional interest and depreciation deductions could allow a refund of substantial taxes paid in prior years.
• Overall Loss Limitation, Section 461(l): The TCJA created a limitation that prohibited business losses from offsetting non-business income in excess of $500,000 ($250,000 for single returns). The CARES Act removes this limitation for tax years 2018, 2019, and 2020, so there is the potential for real estate owners to fully deduct those business losses. This will result in lower current year tax liabilities and could create larger NOLs that could be carried back to prior years as described above.

 Other Tools and Considerations

• Income Tax Extensions: The IRS has changed the filing deadlines for income tax forms and many other taxes from April 15, 2020, to July 15, 2020. As a result, personal or corporate tax returns and extensions do not need to be filed this month. More importantly, payments of those federal taxes due on April 15, 2020, do not need to be paid until July 15, 2020. This includes first quarter 2020 estimated payments. As of now, the federal second quarter 2020 estimates are still due June 15, 2020. The vast majority of states have followed suit and pushed back their deadlines as well.

• Qualified Opportunity Zone (QOZ) Program: QOZ funds and investors are looking for extensions of time to meet various deadlines set forth in the regulations, including the 31 months to spend their cash and the 12 months to reinvest proceeds from sales of assets. The IRS is aware of the concerns and is considering the issue.
• Indiana Property Tax Relief: If there was a significant loss of income during 2020 related to your real estate property, there may be an opportunity to reduce the taxes payable in 2021. There is an Indiana disaster appeal relief form that can be filed in 2021 to cover the 2020 assessment and adjust for the loss of income that occurred during the pandemic. Once the estimated valuation of the property is calculated using the 2020 financials, then the valuation should be compared to the assessment and a disaster relief form filed, if necessary. Additionally, in Indiana, spring tax bills are still due May 11, 2020; however, counties are to waive penalties on payments made after May 11 for a period of 60 days. This waiver does not apply to tax payments which have been escrowed by financial institutions on behalf of property taxpayers.

We understand these are difficult times and that further complications are yet to come, but KSM stands ready to keep you informed. If you have questions, comments, or concerns, please reach out to your KSM advisor or complete this form.

The above content is part of a sponsor spotlight series for select sponsors of ULI Indiana.