To survive and possibly even thrive during the novel coronavirus (COVID-19) crisis, your family business might need to spend some money to reconfigure its operations. The good news is that many business assets, which are placed in service in 2020 through 2022, will qualify for 100% first-year bonus depreciation for federal income tax purposes.
That means you can immediately write off the entire cost on the applicable federal income tax return. It doesn't matter if your business is unincorporated or operates as an S or C corporation.
Under current tax law, the following new and used assets can qualify for bonus depreciation:
•Most business equipment (including computers, peripherals and related software),
- Fixtures, and
- Heavy vehicles with a gross vehicle weight rating above 6,000 pounds, including SUVs, long-bed pickups and vans, that are used over 50% for business.
In addition, under a technical correction included in the Coronavirus Aid, Relief and Economic Security (CARES) Act, real estate qualified improvement property expenditures are now eligible for 100% first-year bonus depreciation. If you're considering real estate expenditures to reconfigure or re-purpose space used in the family business, ask your tax advisor if what you have in mind will qualify for 100% first-year bonus depreciation.
If your business will be unprofitable this year due to the COVID-19 crisis, deductions for 100% first-year bonus depreciation can create or increase a net operating loss (NOL) for 2020. If so, that NOL can be carried back as many as five tax years and trigger refunds of income taxes paid for those years.
The PPP Loan Factor
If you took out a Small Business Administration (SBA) loan under the federal Paycheck Protection Program (PPP) for your family business, for the loan to be forgiven, you must spend the loan proceeds on payroll and other eligible expenses. These expenses include:
- Certain employee healthcare benefits,
- Mortgage interest,
- Utilities, and
- Interest on other existing debt obligations
If you spend PPP proceeds for other business purposes, like acquiring assets that qualify for 100% first-year bonus depreciation, the loan won't be forgiven. And PPP loans that aren't forgiven must be repaid within 24 months. That's OK if the money is better spent for those other business purposes. Plus, the annual interest rate on PPP loans is only 1%.
Congress members have been discussing possible legislation that would liberalize the rules regarding PPP loan forgiveness. Contact your HK tax advisor for the latest developments.