Shops, restaurants, studios, and other storefront-based businesses have some good news coming their way at tax time. One of the provisions in the CARES Act has fixed the so-called retail glitch that came out of the 2018 Tax Cuts and Jobs Act (TCJA). If you’re a business owner who made qualified improvements to real property over the last few years, you may have some tax savings coming your way.
What is the retail glitch?
In the TCJA, Congress attempted to simplify the definition of qualified improvement property, a tax term that had become unwieldy under a series of older laws. With the new definition, the intention was for qualified improvement property to be eligible for 100% bonus depreciation. Unfortunately, an error in the bill led to the exact opposite outcome, excluding qualified improvement property from the category required for bonus depreciation. In short, the retail glitch, as it came to be known, ended up costing businesses more money in taxes instead of creating the cost savings Congress set out to enact.
Last fall, the IRS and Treasury indicated that the retail glitch would only be remedied by legislative action. In laymen’s terms, despite extensive lobbying from business groups, the IRS told taxpayers, “This isn’t our fault. Go complain to your elected representatives.”
How did coronavirus lead to a fix for the retail glitch?
As most Americans know, legislation passed during a crisis is notorious for accomplishing all sorts of things lawmakers have been unable to pass under regular circumstances. The CARES Act introduced a plethora of tax credits, loans, regulation easing, and other tweaks intended to help businesses weather the storm in the economy. Suddenly, the retail glitch had its moment in the spotlight. The CARES Act altered the definition of qualified improvement property so that improvements businesses made to the interior of commercial buildings would qualify.
It sounds like a minor technicality, but this is one of those times when words can make all the difference. Thanks to the CARES Act, businesses that renovated or otherwise improved their facilities in 2018 or 2019 may be eligible for a tax refund.
Businesses in all industries that had qualified commercial property improvements to the interior of their businesses can take advantage of this favorable change. Companies in the retail, restaurant, and hospitality industries should pay particularly close attention.
Can an affected business receive a tax refund now?
The big question is how businesses affected by the retail glitch can take advantage of the remedy. There are a few options, depending upon when the work was completed on the property, as well as your filing status. The smoothest scenario will occur for businesses that completed improvements in 2019 and haven’t yet filed a 2019 return. In that case, we urge you to take another look at your 2019 tax data, because you may have an unexpected refund coming your way. If you’ve already filed your 2019 return, we can amend the return to include the applicable write-off. Another option is to correct the situation when you file your 2020 taxes. However, if you have cash coming your way from the IRS, we encourage you to claim it as soon as possible.
For businesses that made qualified improvements in 2018, the path forward is less clear. You have the option to file either an amended return for 2018 or a change in accounting method on your next filed return to make the correction.
In any event, if you made improvements to business property that were excluded from bonus depreciation due to the retail glitch, meet with your tax advisor. Your trusted strategic advisor can go through the options available to you and your business to take advantage of this additional tax savings.