Want a Larger Tax Refund? Consider Extensions and Amendments

Partnerships and S corporations that have not yet filed tax returns due March 15 should consider requesting an extension, according to Marc Wieder, CPA, CGMA. The partner and co-leader of Anchin’s real estate group advises taxpayers to avoid last-minute rushes and shares the following tips.

Partners’ Individual Income Tax Basis 

Partnerships and limited liability corporations filing as partnerships are required to submit the Schedule K-1 (Form 1065). The capital account reconciliation, which shows each partners’ equity in the partnership, now must be on an income tax basis. In the past, filings could have been under Generally Accepted Accounting Principles (GAAP) or the Internal Revenue Code (IRC) Section 704(b).

“It requires figuring out what is the income tax basis for each of the partners,” says Wieder. “If that hasn’t been done yet, I think you may have to extend as this can be a lengthy process.”

Retroactive QIP Bonus Depreciation

Qualified improvement property (QIP) refers to the interiors of non-residential buildings, and also includes restaurants and retail properties. Under the Tax Cuts and Jobs Act of 2017 (TCJA), qualified improvement property (QIP) in use after December 2017 had a 39-year tax life. The Coronavirus Aid, Relief and Economic Security (CARES) Act, passed in 2020, retroactively shortened the QIP depreciation period to 15 years. As such, it qualifies for bonus depreciation, which allows for accelerated tax benefits.

If a real estate partnership took a QIP deduction under the prior rules, they can amend their returns or file an IRS Form 3115 for a change in accounting method. In doing this, taxpayers can pick up the additional bonus depreciation in 2020 filings, which they missed in 2018 and 2019. “This change, if you elect to do bonus depreciation, can be a significant number,” comments Wieder.

Excess Loss Limitations

TCJA Section 461(I) limits non-corporate taxpayers’ deductions for net business loss to $250,000 for single filers and $500,000 for joint filers.

However, because the COVID-19 pandemic wrought severe financial hardships on businesses and individuals, the CARES Act temporarily repealed this section. The loss limitations no longer apply for the taxable years of 2018 through 2020. Wieder recommends amending prior returns to account for excess losses, if applicable, in order to receive tax refunds.

“That is found money. But you have to amend to get your money back. You can’t carry [forward] that loss that you would have been entitled to in 2018 or 2019,” explains Wieder.

Accounting for COVID-19

How businesses respond to the coronavirus can also have tax consequences. For example, how are Paycheck Protection Program (PPP) loans treated? Were the loans forgiven? Although Congress has exempt PPP loans from federal taxation, state taxes differ. 

Plus, situation-specific agreements could complicate tax liabilities, especially for accrual basis taxpayers. Landlords may have deferred rent or made other tenant concessions. What’s required to report in 2020? “Be careful,” Wieder cautions. “You may be unpleasantly surprised that you have more income for tax purposes in 2020 than you thought you had.”

A tax practitioner’s fluency in COVID-19 laws and regulations is critical in today’s changing tax environment.

Future Expectations and 1031 Exchanges

President Biden has prioritized getting the pandemic under control. He recently announced there will be enough vaccine doses for every adult in the US by the end of May, acknowledging actual inoculations would take longer.

Biden seems to be doing a good job accelerating the vaccination schedule, opines Wieder. “That could mean more time to work on other things, such as overhauling the tax system,” he adds. “There have been three stimulus bills that cost the government a lot of money and they’ll need to get the money back.”

The IRC Section 1031 like-kind exchanges allow a deferral of capital gains taxes, with the sale and purchase of the same kind of property. The TCJA eliminated this benefit for all property, spanning personal and intangible property rights, with an exception for real estate.

The Biden administration has floated the idea of eliminating 1031 like-kind exchanges for real estate investors with incomes exceeding $400,000.

However, Wieder predicts this will be extremely difficult due to the extent of businesses heavily involved with 1031 exchanges. He points to companies such as Walgreens, KMart, CVS and banks as having triple net lease properties tied to 1031 exchanges.

“It would change the whole dynamic of how real estate has been operating for so many years,” says Wieder. But he surmises the government could alter the provision, including lowering the required rollover percentage or taxing a certain percentage in the exchanges. There could be ways to keep 1031 alive, while modifying it to generate revenue.

Finally, despite clouds currently creating some shadows over real estate, the tax pro sees a silver lining. He reminds investors, “If you are an optimist and you say prices are really low now, real estate has always come back.”