The COVID-19 pandemic is affecting every area of business, including real estate considerations. In fact, many new laws, programs and measures, especially the Coronavirus Aid, Relief and Economic Security (CARES) Act, have significant impacts on real estate.
Convenience store operators and owners are benefiting from immediate write-offs for the expense of fixing up their stores, an increased deduction for business interest expenses, new rules for rent concessions and debt restructuring, as well as new rules for net operating losses that can generate much-needed cash for troubled businesses.
The CARES Act
The CARES Act included a technical correction to the 2017 Tax Cuts and Jobs Act (TCJA), related to the manner in which the cost of certain improvements to existing buildings are recovered.
Under the TCJA, expenditures for interior, nonstructural improvements made to existing nonresidential real property (e.g., retail or office leasehold improvements) were denied status as Qualified Improvement Property (QIP) and given a 39-year recovery period.
The new rules mean that QIP expenditures prior to 2023 now qualify for bonus depreciation and are eligible for an immediate 100% write-off, with the write-off phasing down in 2023 or later tax years.
Plus, convenience store operators who elect to forgo the immediate write-off can generally depreciate QIP expenditures over a generous 15-year recovery period. In order to claim the 100% bonus depreciation or the special 15-year recovery period for prior year QIP expenditures, most will file an amended tax return.
The 2017 passage of the TCJA reduced the tax burden of many convenience store businesses. However, to offset those cuts, new limits were enacted on the amount of business interest deductible for tax purposes to no more than 30% of an operation’s EBITDA (earnings before interest, taxes, depreciation and amortization are added back).
Although small businesses were exempt from the business interest expense limitation, the CARES Act temporarily increased the amount of deductible business interest expense from 30% to 50% for the 2019 and 2020 tax years.
Loans and NOLs
Usually, when a debt is canceled, forgiven or discharged for less than the amount owed, the result is Cancellation of Debt (COD) income. Similar consequences occur when property secured by debt is taken in satisfaction of that debt and where the property is treated as having been sold.
However, as part of the Small Business Administration’s (SBA) debt relief efforts, businesses pay the principal, interest and fees of current 7(a), 504 and microloans issued prior to Sept. 27, 2020. Best of all, the six-month payment relief is not a deferment, but actual debt forgiveness.
What’s more, thanks to the CARES Act, any loan forgiveness under the $350 billion small loan programs can be excluded from income for tax purposes. For both measures, a three-year lookback ensures that businesses cannot be broken up to come in under the $25 million “small business” threshold.
Net Operating Losses (NOLs) are typically subject to a taxable income limitation, and until now, they couldn’t be carried back to reduce income in earlier tax years.
The CARES Act, however, allows convenience store businesses to carry back NOLs from 2018, 2019 and 2020 for five years and temporarily removed the TCJA rule limiting losses to 80% of taxable income.
The new rules also modify loss limits for pass-through businesses and sole proprietors, which mean all business losses can now be used to generate badly needed cash refunds of taxes paid in earlier, hopefully more profitable years.
Some tenants are extending their leases in exchange for rent reductions, while some landlords are offering rent abatement. And then there are the many government programs, loans, grants and limits impacting c-stores — tenant or property owner alike.
In every situation, not only should the tax consequences be a consideration, but also the survival of the convenience store business.