Co-written by Marshall Lund, CFP®, Wipfli Financial Advisors
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided a number of benefits to taxpayers within the construction and real estate industries. Its provisions for business relief have garnered most of the media attention. But close examination reveals several opportunities for business owners to protect their individual wealth, too.
Individuals can leverage several provisions in the CARES Act to generate cash flow now and take advantage of favorable tax conditions. For example:
- The CARES Act eliminated restrictions on net operating losses (NOLs) that were created by the Tax Cuts and Jobs Act (TCJA); rather than being capped at 80%, construction and real estate owners can use NOLs to eliminate 100% of their taxable income. What’s more, NOLs can be carried back for five tax years. Taxpayers can apply for a refund of previous taxes paid by utilizing the NOLs, reaching back as far as 2013.
- Depreciation terms for qualified improvement property (QIP) were also updated in the CARES Act, correcting an error introduced in the TCJA in 2017. Retroactively, the CARES Act allows 100% bonus depreciation on any QIP placed in service since January 1, 2018, rather than requiring it to be spread over 39 years. Taxpayers can amend their 2018 and 2019 tax returns to claim bonus depreciation and request a refund for taxes they previously paid.
With an infusion of cash, individuals can take advantage of other CARES Act provisions to build a more resilient financial future. Here are four potential strategies to follow:
1. Roth account conversion
Because of the economic slowdown, many construction and real estate leaders are likely to land in a lower marginal tax bracket this year. That makes it an attractive time to convert some of their 401(k) or traditional IRA funds into a Roth account. The funds will be taxed as ordinary income when they’re released, but the taxation may occur at a lower marginal tax rate compared to previous years. And, they can get more market shares while the market is down. Any future growth on the Roth dollars is tax-free.
2. Required minimum distribution
For 2020, the required minimum distribution has been waived. That could result in less income or lower tax brackets for some individuals, giving them an opportunity to save or convert their retirement savings into another vehicle.
3. Life insurance
Life insurance policies can be used as income replacement or a retirement savings vehicle; they can also be used as collateral for loans. As such, life insurance policies can be a viable way for construction and real estate professionals to create liquidity. Many types of policies have generally become more affordable in recent years, thanks to an increase in life expectancy. If bond yields remain low, insurance providers are anticipated to increase prices to make up the difference.
4. Tax-loss harvesting
Construction and real estate leaders can use new sources of cash flow to benefit from the depressed market. “Buy low, sell high” nearly goes without saying; in today’s unique situation, tax-loss harvesting may be another attractive strategy. If taxable brokerage accounts have declined steeply in value, that loss may be used to offset current or future gains and to reduce overall tax liability.
Nobody should make knee-jerk investments, but individuals can gain some advantages from the volatility of the market, under the expectation that the market will, eventually, recover. With the proceeds of the sale, you could simultaneously buy a substitute investment to replace the original investment. This helps ensure that your overall portfolio allocation and expected return remains similar.
The tax implications introduced by the CARES Act should be considered in concert with personal and business goals. A personal financial and business tax advisor can create a strategy to keep you afloat today and well-positioned for tomorrow.
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