The IRS continues to provide guidance as part of its ongoing efforts to implement the CARES Act and respond to the economic challenges arising from COVID-19 pandemic. As part of our continuing coverage of COVID-19 relief, this Tax Special Alert highlights the relief provided in:

• Notice 2020-23, which provides a grace period to file and make payments to July 15, 2020 for many tax returns and other time sensitive acts that otherwise had to occur on or after April 1, 2020 and before July 15, 2020, and
• Rev. Proc. 2020-22, which allows real property trades or business to revoke their elections under the Section 163(j) interest expense limitations so that those businesses can take full advantage or certain provisions in the CARES Act.

Notice 2020-23 – Grace period until July 15, 2020 to file a wide variety of returns, pay associated taxes, and perform certain administrative actions.

On April 9, 2020, the IRS released Notice 2020-23, which provides a grace period for additional filing deadlines for individuals and businesses. Under Notice 2020-23, all taxpayers that have a filing or payment deadline falling on or after April 1, 2020 and before July 15, 2020 will be treated as timely filing or paying their taxes if such filing or payment occurs by July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment also will be suspended until July 15, 2020. Individuals, trusts, estates, corporations, and other non-corporate tax filers may qualify for the extra time to file certain tax returns. Significantly, the grace period now applies to fiscal year taxpayers with filing deadlines in the April 1, 2020 to July 15, 2020 period and to the second quarter of estimated tax payments for calendar year taxpayers.  

This notice also grants a grace period until July 15, 2020 for taxpayers to perform other time sensitive actions that are due to be performed on or after April 1, 2020 and before July 15, 2020.  This relief includes providing additional time to file a claim for credit or refund of any tax if the period for filing that claim would have otherwise expired during the period from April 1, 2020 and through July 14, 2020.

Rev. Proc. 2020-22 – Allows certain taxpayers to revoke a real property trade or business election and make certain other elections under Section 163(j) and provides other Section 163(j) CARES Act guidance.

A business that makes an irrevocable election to be an electing real property trades or businesses (RPTOB) for purposes of Section 163(j) is not subject to the Section 163(j) interest limitation with respect to its RPTOB, but it must depreciate its nonresidential real property, residential rental property, and qualified improvement property using the alternative depreciation system (ADS) and is ineligible for bonus depreciation under Section 168(k) with respect to that property.

On April 10, 2020, the IRS released Revenue Procedure 2020-22, which allows taxpayers that previously elected to be a RPTOB for purposes of Section 163(j) to revoke their election by attaching an “election withdrawal statement” to an amended return or administrative adjustment request.  A revoked Section 163(j) election is treated as if it were never made.  Thus, choosing to retroactively revoke a Section 163(j) election does not prevent a taxpayer from choosing to make a Section 163(j) RPTOB election again in the future.  This revenue procedure also allows taxpayers to make a late Section 163(j) RPTOB election.

Revoking a Section 163(j) election allows a real property trade or business the opportunity to take full advantage of certain provisions in the CARES Act, including:

• The ability to claim bonus depreciation on qualified improvement property,
• The ability to increase the Section 163(j) limit on interest deductibility from 30% of EBITDA to 50% of EBITDA (for 2019 and 2020 for corporate taxpayers and 2020 for partnerships), and
• The ability to use 2019 adjusted taxable income for purposes of calculating a taxpayer’s 2020 interest limitation under Section 163(j).

For more information regarding these CARES Act provisions, see A&M’s prior Special Tax Alert from March 27, 2020. 

However, whether revoking a Section 163(j) RPTOB election makes sense will require a detailed analysis of each taxpayer’s particular facts and circumstances.  Taxpayers have until October 15, 2021 to make a real property trade or business “election withdrawal statement”.  

Rev. Proc. 2020-22 also provides mechanical guidance on how a taxpayer elects:

• To apply a 30% limitation instead of a 50% limitation for purposes of Section 163(j),
• To use its 2019 adjusted taxable income for purposes of the 2020 Section 163(j) calculation, and 
• To not apply the 50% excess business interest expense rule.  

A&M Taxand Says  

The guidance covered in this TAW is part of the government’s efforts to provide liquidity to taxpayers.  Notice 2020-23’s provision of a grace period until July 15, 2020 for the filing of almost all returns and payment of associated taxes for many returns that need to be filed during the period beginning on April 1, 2020 through July 14, 2020, allows many additional taxpayers to generate additional short-term liquidity by delaying tax payments.

Additionally, Revenue Procedure 2020-22 is particularly important for real estate businesses that previously elected RPTOB status under Section 163(j). These businesses should undertake a careful modeling exercise to determine whether revoking that election could result in a reduced tax liability for 2019 or 2020. While revoking that election may not always be the right answer, for certain taxpayers that option could reduce cash tax payments and even potentially result in immediate tax refunds. Alvarez & Marsal is available to help you with this modeling exercise and your other tax questions as you work through this difficult time.