There were two developments today you should be aware of. The Colorado Department of Revenue issued guidance on the effects of the CARES Act on Colorado taxes. This guidance takes a very draconian approach to applying the law as explained below.
The second development was Congress passed a bill that extends the deadline for PPP loan applications. Any businesses that have not yet applied for a PPP loan may still obtain a loan. Details on this extension are also below.
Although Colorado generally automatically conforms to federal law changes, the Department of Revenue is applying the conformity in a very convoluted way that harms many taxpayers. The department’s position is that Colorado conforms to the CARES Act for 2020 taxes but does not accept the retroactive provisions of the law. In addition, in instances where a taxpayer loses the benefit of those provisions for prior years, they also lose any 2020 or later benefits that they would have received without the CARES Act.
Depreciation Change for Building Improvements
The CARES Act corrects a drafting error from the 2017 legislation and changes the depreciable life of building improvements to 15 years. As a result, these assets qualify for bonus depreciation. The Colorado guidance provides that a taxpayer who corrects the classification on a 2018 or 2019 return is not allowed to make that change for Colorado purposes. Thus, the taxpayer must make a Colorado adjustment to remove the effects of the change for the 2018 and 2019 returns.
However, Colorado is not allowing an adjustment to the federal income for 2020 and later years. Thus, the business never receives any Colorado benefit for that building improvement.
As an example, assume that a business spent $100,000 on building improvements on July 1, 2019. If the taxpayer files the 2019 federal return claiming bonus depreciation on those improvements, they are ineligible to claim that bonus depreciation for Colorado purposes. Instead, the Colorado deduction would be based on a 5 ½ months depreciation on a 39-year life. The Colorado depreciation would be $1,175. The taxpayer would need to add $998,825 of depreciation back to the federal income to calculate Colorado income.
In addition, the Colorado guidance states that they do not allow a subtraction from federal income for 2020 or later. Thus, the taxpayer is treated as having received a $100,000 deduction even though they actually received a $1,175 deduction. Presumably, when the taxpayer sells the property, there still would be no adjustment to the federal gain on sale.
With this guidance, Colorado taxpayers need to reevaluate their options for handling 2018 and 2019 building improvements. One option is to claim the federal bonus depreciation and forgo the Colorado deduction. For most taxpayers who qualify to offset 100% of the cost of the improvement as a §179 deduction, claiming the §179 deduction is probably a better option. Taxpayers who initially filed the 2018 or 2019 return claiming depreciation as 39-year property have the option of claiming the remainder of the depreciation in 2020 as a depreciation method change. This method of filing should not require any Colorado adjustments.
5 Year NOL Carryback
The CARES Act allows a 5-year carryback of NOLs from 2018, 2019, or 2020 returns. The Colorado guidance prohibits carrying any of these NOLs back to prior years. In addition, any taxpayer who carries the NOL back for federal purposes loses that NOL for Colorado purposes. According to the guidance the taxpayer’s only option to avoid this result is to elect not to carryback the NOL for federal purposes.
80% Limitation on NOL Usage
The CARES Act suspended the limitation that only 80% of taxable income can be offset with NOLs until 2021. Colorado does not conform to this change until 2020.
Business Interest Limitation
The CARES Act modified the calculation of the business interest limitation for large taxpayers. Previously, interest could only offset 30% of income for these taxpayers. Now they can offset 50%. If a taxpayer subject to these rules files a 2018 or 2019 return claiming the interest based on the 50% limitation, that taxpayer must add the difference between the 50% and 30% limitation to federal income for that year. In addition, the taxpayer does not receive a carryover of the excess interest.
Excess Business Loss Limitation
The CARES Act suspended the excess business loss limitation for 2018, 2019, and 2020 tax years. However, Colorado still applies the limitation for 2018 and 2019. In addition, any excess business losses for 2018 and 2019 are lost as Colorado carryovers.
Any taxpayer who filed a Colorado return for a pre-2020 tax year claiming any of these benefits is required to file an amended return to remove those benefits.
Generally, when states decide not to conform to federal tax changes, they continue to allow any tax benefits to be claimed under the state rules that applied before the federal change was adopted. This Colorado guidance takes a much different approach. Colorado is permanently disallowing any benefit of deductions for items that the federal government liberalized with the CARES Act.
Extension of PPP Loan Application Deadline
Congress has passed an act that extends the deadline for receive a PPP loan until August 8. Businesses who have not already received funds from a PPP loan are still eligible for a loan.
If you have any questions about PPP loans and this development, reach out to us at 303-989-7600.