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How the CARES Act can help CRE business owners protect their personal finances

Apr 28, 2020

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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Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services and fees is set forth in Wipfli Financial’s current Form ADV Part 2A brochure, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.

Note that Wipfli LLP and Wipfli Financial, although affiliated companies, are separate entities. Wipfli Financial provides investment management and financial planning services, and does not provide tax, accounting or legal advice, or recordkeeping/plan administrative services. Services offered by Wipfli LLP, if requested by the client, will be provided under a separate and distinct engagement letter. Clients are under no obligation to engage Wipfli Financial or Wipfli LLP, and are free to choose any professional who provides similar services.

Author(s)

Josh A. Graham, CPA
Partner
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