The Consolidated Appropriations Act, 2021 (the "Act"), passed on December 27, 2020, included a $2.3 trillion spending bill to provide additional COVID-19 relief and provide funding for the government for the next fiscal year. The Act includes potential tax savings opportunities and incentives for real estate owners, developers and investors. Following are key tax provisions to be aware of or that may impact you:
Potential Retroactive Depreciation Deduction for Residential Real Estate Businesses
Residential rental property held by an electing real estate trade or business can now use a 30-year alternative depreciation system (“ADS”) recovery period instead of a 40-year ADS recovery period for real property previously placed in service before 2018.
Under The Tax Cuts and Jobs Act (“TCJA”), residential rental businesses that elected out of the interest expense limitation was required to forgo a shorter depreciable recovery period of 27.5 years to a longer recovery period under the ADS. Residential property placed in service before 2018 was required to change to a 40-year ADS recovery period. In contrast, the TCJA reduced the depreciable ADS life from 40 years to 30 years for property placed in service after 2017. The Act includes a technical correction to the TCJA, reducing the 40-year recovery period to a 30-year recovery period for real property placed in service before 2018. This provision applies only if the ADS was not used with respect to the property before 2018.
We anticipate the Internal Revenue Service (“IRS”) will issue guidance to claim the retroactive depreciation deduction. On the state level, it's unclear whether New York will follow the federal treatment since New York decoupled from federal changes made after March 1, 2020.
179D Deduction for Energy-efficient
The 179D deduction for energy-efficient commercial buildings, which was set to expire at the end of 2020, has been made permanent. This is a welcome relief, and real estate owners can now plan accordingly without time restructuring due to expiring provisions.
The deduction applies to depreciable energy-efficient commercial building property installed as part of the interior lighting, heating, cooling, ventilation, hot water systems or the building envelope. The property must be installed as part of a certified plan prescribed by the Secretary of Treasury to reduce total annual energy costs by at least 50% compared to a reference building that meets specified minimum standards. The Act also provided for the use of updated reference standards beginning in 2021. The deduction is limited to an aggregate of $1.8 per square foot of the building, indexed for inflation starting 2021.
The 179D deduction is claimed by the taxpayer entitled to depreciate the property. This immediate deduction is reported on Form 4562, Depreciation and Amortization as a reduction of basis, and is subject to ordinary income recapture upon disposition of the property. Further guidance is pending from the IRS for recapture.
Floor of 4% for Certain Low Income Housing Tax Credits ("LIHTC")
Starting in 2021, the Act provides a permanent 4 percent rate floor for calculating credits related to the acquisition and housing bond-financed developments for low-income housing credit purposes. Specifically, credits for acquiring projects for rehabilitation or projects financed with individual tax-exempt bonds will not be reduced below 4% even if prevailing interest rates dictate a lower rate. The Act also provides a one-year extension of the place-in-service deadline for eligible buildings and a 10% test deadline for disaster credits.
With the reduced rate, the credit is worth more and therefore encourages investment in low-income communities.
Grants for Shuttered Venue Operators
The Act provides $15 billion in grants to shuttered venue operators through the Small Business Administration (“SBA”). The maximum initial grant allowed is 45% of gross revenue for the 2019 calendar year, capped at $10 million. The grant proceeds can be used for payroll costs, rent, utilities and personal protective equipment. These grants are excluded from gross income, and the qualified expenses paid in the ordinary course of business from the proceeds are fully deductible.
The eligible entities include live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theater operators and certain talent representatives. Entities also include state or local governments if acted solely as a venue operator.
The venue must have defined performance and audience space with a fixed setting, either indoors or outdoors. Businesses must have been in operation as of February 29, 2020, have 25% gross revenue deduction from any 2020 quarter compared to similar 2019 quarter, and not applied or received a PPP Loan after December 27, 2020.
Publicly traded corporations or businesses controlled by a publicly traded corporation are not eligible. Applicants can register for a grant with the System for Award Management at www.SAM.gov.
Several of the provisions under the Act will require IRS guidance to implement. We will continue to advise you as additional guidance is released. In the meantime, contact your Friedman advisor with any questions.