According to Marc Wieder, CPA, CGMA, partnerships and S corporations that have yet to file their tax returns due by March 15 should consider requesting an extension. The partner and co-leader of Anchin Real Estate Group advises taxpayers to avoid last-minute rush and shares the following tips.
Personal tax base of partners
Partnerships and limited liability companies filed as partnerships are required to submit Schedule K-1 (Form 1065). The capital account reconciliation, which shows the equity of each partner in the partnership, must now be calculated on an income tax basis. In the past, filings could comply with generally accepted accounting principles (GAAP) or section 704 (b) of the Internal Revenue Code (IRC).
“This requires determining what is the income tax base of each of the partners,” explains Wieder. “If it hasn’t been done yet, I think you may need to extend as it can be a long process.”
Retroactive amortization of the PAQ premium
Qualified Improvement Property (QAP) refers to the interiors of non-residential buildings and also includes restaurants and retail properties. Under the Tax Reductions and Employment Act 2017 (TCJA), qualified improvement goods (QIP) used after December 2017 had a taxable term of 39 years. The CARES law (Coronavirus Aid, Relief and Economic Security Act), adopted in 2020, retroactively shortened the amortization period of the PAQ to 15 years. As such, it is eligible for bonus depreciation, which allows it to benefit from accelerated tax advantages.
If a real estate partnership took a QIP deduction under previous rules, they can change their returns or file an IRS Form 3115 for a change in accounting policy. By doing so, taxpayers can recoup the additional bonus amortization in 2020 deposits, which they missed in 2018 and 2019. “This change, if you choose to perform bonus amortization, can be a significant number,” comments Wieder.
Limits on excess losses
Section 461 (I) of the TCJA limits unincorporated taxpayer deductions for net business loss to $ 250,000 for sole filers and $ 500,000 for joint filers.
However, since the COVID-19 pandemic has caused serious financial hardship for businesses and individuals, the CARES Act has temporarily repealed this article. Loss limitations no longer apply for the 2018 to 2020 tax years. Wieder recommends amending previous returns to account for excess losses, if any, in order to receive tax refunds.
“There is money. But you have to change to get your money back. You can’t wear [forward] this loss to which you would have been entitled in 2018 or 2019 ”, explains Wieder.
The way businesses respond to the coronavirus can also have tax consequences. For example, how are Paycheck Protection Program (P3P) loans processed? Have the loans been canceled? Although Congress has exempted PPP loans from federal tax, state taxes differ.
In addition, situation-specific agreements could complicate tax obligations, especially for taxpayers on an accrual basis. Landlords may have deferred rent or made other tenant concessions. What to declare in 2020? “Be careful,” warns Wieder. “You might be unpleasantly surprised to have more tax revenue in 2020 than you think. “
A tax professional’s mastery of COVID-19 laws and regulations is essential in today’s changing tax environment.
Future expectations and 1031 exchanges
President Biden has prioritized containing the pandemic. He recently announced that there would be enough doses of the vaccine for every adult in the United States by the end of May, acknowledging that actual inoculations would take longer.
Biden appears to be doing a good job of speeding up the immunization schedule, Wieder believes. “It could mean more time to work on other things, like overhauling the tax system,” he adds. “There have been three stimulus bills that cost the government a lot of money and they will have to get the money back.”
The IRC Section 1031’s similar exchanges allow for a deferral of capital gains tax, with the sale and purchase of the same type of property. The TCJA has removed this benefit for all property, covering personal and intangible property rights, except real estate.
The Biden administration launched the idea of eliminating 1,031 exchanges of the same nature for real estate investors with incomes in excess of $ 400,000.
However, Wieder predicts that this will be extremely difficult due to the scale of companies heavily involved in 1,031 exchanges. It indicates that companies such as Walgreens, KMart, CVS and banks have triple net rental properties tied to 1,031 exchanges.
“It would change the whole dynamic of how real estate has operated for so many years,” says Wieder. But he assumes the government could change the provision, including lowering the required turnover percentage or taxing a certain percentage in trade. There might be ways to keep 1031 alive, while modifying it to generate income.
Finally, despite the clouds that are currently creating some shadows on real estate, the tax expert sees a glimmer of hope. He reminds investors, “If you’re bullish and say the prices are really low now, real estate has always come back.