With Coronavirus Stimuli Timing is Everything

The Senate recently voted to increase the funding for the Paycheck Protection Program, in doing so exposed some of the issues relating to the program. One key issue: timing. The importance on timing flows to some of the tax provisions in the law as well. In drafting the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) many tax provisions were added to ensure businesses could maximize cash flow in the short term. However, if taxpayers are not paying attention to timing they could see reduced provisions or lose them completely.

One area that is critical to timing is the change to Qualified Improvement Property (QIP). Under the CARES Act the “retail glitch” for QIP was fixed. The simple explanation for this is QIP is not eligible for bonus depreciation. This fixes an error that affected many taxpayers for the 2018 and 2019 tax years. A taxpayer that placed in service QIP in 2018 or 2019 can now fully deduct these assets through bonus depreciation. However, there are multiple ways that a taxpayer can make this change. For a taxpayer that has filed their 2018 return, but has not yet filed 2019, they can choose to amend their return, or file a form 3115. A taxpayer that as filed both their 2018 and 2019 return can only fix QIP installed in 2018 by filing a form 3115 “Change in Accounting Method”. This is time critical for two reasons.

The first reason is that a taxpayer with QIP installed in 2018 may prefer to amend that return if their tax rate was higher in 2018 than in 2019. If the taxpayer files their 2019 return, they will be locked out of amending 2018. For a taxpayer that has already filed 2019 the timing is just as critical. The IRS allows a taxpayer to amend their 2019 return with a form 3115 up until the extension date (Rev. Proc. 2015-13 Section 6.03(4)(a)(ii)). This means a taxpayer that has already filed their 2019 return, can go back, and file a 3115 for 2019 by amending their return, and could see a refund in the short term.

Timing is especially important when Net Operating Losses (NOLs) are considered. With the new carry back provisions, a taxpayer needs to consider not only the years in which deductions are taken, but also the years in which they could carry back these deductions. Take for example a taxpayer that had high taxable income in 2017 and 2019, but due to a plant renovation and equipment acquisitions had no taxable income in 2018. Because of the renovation the taxpayer is sitting on significant QIP in the 2018 tax year. If they amend their 2018 return, they will create losses that they can carry back into 2017. However, if they file their 2019 return with the 3115 those changes would reduce their 2019 taxable income. Since the Tax Cuts and Jobs Act (TCJA) reduced tax rates starting in 2018, this taxpayer might be better off amending their 2018 return, increasing their losses and carrying those losses back to 2017.

Timing is also critical for certain partnerships. Under the 2015 Bipartisan Budget Act (BBA), partnerships that did not elect out were not allowed to amend returns starting with tax years beginning on or after 1/1/18. This means that for these partnerships amending returns to take advantage of the changes in the CARES Act would be limited. The IRS answered this in Rev. Proc. 2020-23. Under this Revenue Procedure eligible partnerships are allowed to amend partnership returns for the 2018 and 2019 tax years. However, this requires that the partnership files amended Forms 1065, and furnishes Schedules K-1, before September 30, 2020. This creates another critical timing issue that companies need to be aware of in this current economic environment.

While we pointed out two timing issues above, there are other timing issues to consider as it relates to these provisions. From electing out of the “Real Property Trade or Business Election” as detailed in Rev. Proc. 2020-22, to taking advantage of the accelerated AMT credit refund provisions under the CARES Act. The key factor for taxpayers and tax professionals to remember is to not hesitate on these provisions. Businesses are in desperate need of cash flow in this difficult time, it is important to get the timing right on tax provisions in order to help provide needed cash infusion.

With Coronavirus Stimuli Timing is Everything

With Coronavirus Stimuli Timing is Everything

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