Preface: Enacted to bring relief for those economically affected from the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides roughly $2 trillion in economic relief to eligible businesses and individuals with legislation of historical magnitude.
CARES ACT: Qualified Improvement Property Depreciation + Student Loans
In addition to numerous other provisions that provide cashflows to businesses, the CARES Act includes a modification to the recovery period for qualified improvement property.
Depreciation of Qualified Improvement Property
Under the CARES Act, a 15-year recovery period is retroactively assigned to qualified improvement property placed in service after December 31, 2017. Therefore, qualified improvement property may be depreciated over 15 years or, alternatively, qualifies for 100 percent bonus depreciation if all bonus requirements are met.
Qualified improvement property is broadly defined as an internal improvement to nonresidential real property but does not include improvements related to elevators and escalators, the internal structural framework, or an enlargement of the building. The improvement must be placed in service after the date the improved building is first placed in service. The improvement must be made by the taxpayer. Therefore, the 15-year recovery period and bonus depreciation does not apply to a taxpayer that purchases a building that includes qualified improvement property depreciated by the seller over 15 years.
Opportunity to Amend for Tax Refunds
As a result of the retroactive application of the reduced recovery period, if a taxpayer filed two or more returns using a 39-year recovery period for qualified improvement property placed in service after 2017 an incorrect accounting method was adopted and automatic consent to change to the correct method must be filed on Form 3115. Taxpayers who only filed one return using a 39-year recovery period (e.g., a calendar year taxpayer who has not filed a 2019 return) may file an amended return to correct the recovery period or may file Form 3115 with their current year return.
Generally, a taxpayer must elect out of bonus depreciation by the extended due date of the return for the tax year in which the property eligible for the bonus was placed in service. Some taxpayers may not want to claim 100 percent bonus depreciation on qualified improvement property that retroactively qualifies for the additional allowance. The IRS will presumably issue guidance allowing these taxpayers to make a late election out of bonus depreciation and to file an amended return or Form 3115, as applicable, based on a 15-year recovery period.
The reduced recovery period not only allows businesses to improve their cashflow by filing an amended return, but also encourages investment in further qualified property improvements to stimulate the economy.
Exclusion for Employer Payments of Student Loans
The CARES Act provides improved tax relief and tax incentives for individuals and businesses alike. Included in the numerous tax provisions is the exclusion of up to $5,250 from income for payments of an employee’s education loans.
Normally, employee benefits provided under an employer’s nondiscriminatory educational assistance plan are not includible in the employee’s gross income to the extent the benefits do not exceed $5,250 for the tax year.
Educational assistance means the employer’s payment of expenses incurred by or on behalf of an employee for education or the employer’s direct provision of education to an employee. Assistance includes, but is not limited to, tuition, fees, and similar payments, books, supplies and equipment. The employer’s plan must meet certain requirements to qualify.
Under the CARES Act, the definition of educational assistance has been expanded to include the payment of student loans. Payments made before January 1, 2021, by an employer to either an employee or a lender to be applied toward an employee’s student loans can be excluded from the employee’s income. The payments can be of principal or interest on any qualified education loan that is incurred by the employee for the employee’s education.
The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employee. Any excess of benefits is subject to income and employment taxes.
Double benefit denied. No deduction is allowed for student loan interest payments paid by the employer that are excluded from the employee’s gross income.
Please call our office with any questions on provisions of the CARES Act. We are here to answer your tax questions.