November 22, 2017: Important Tax Reform Update

On Tuesday, November 21, ICSC had a series of Capitol Hill meetings to discuss industry concerns with the Senate tax reform bill. We wanted to update you on these latest conversations as well as provide the actual legislative language of the Senate bill released last evening. (Click here for text of the full bill.)

Tax advisors here in Washington are pouring over the 515-page document to analyze. The legislative language provides some clarity to what the Senate Finance Committee initially approved on November 16.

Here are the issues we are most closely following:

Pass-through provisions - The Senate provides a 17.4% deduction for active businesses. However, the deduction cannot exceed more than 50% of W-2 wages paid by the firm. For most real estate businesses, this will severely limit the ability to use the deduction in the Senate bill.  ICSC supports the House proposal which is more favorable to capital intensive industries, like real estate, because it allows business owners to apply a 25% rate to a portion of their income based on the amount of capital they have invested into a project. (Click here for specific legislative text, starting on page 21.)

Carried Interest - Both the House and the Senate bills would require a 3-year holding period for a carried interest to get the lower, long-term capital gains rate. While ICSC believes that the current-law treatment of capital gains accurately reflects the risk of investing in long-term real estate developments, the longer holding period is a much better outcome than other proposals offered thus far to treat all carried interest as ordinary income. We expect there will be less favorable amendments considered when the Senate bill is voted on next week on the Senate floor. Stay tuned for future Legislative Action Alerts on this issue. (Click here for specific legislative text, pages 214-218.)

Active Losses Limitation - This is the matter ICSC notified you about late last week. The Senate's legislative text makes it clear that business owners' will still be able to net their active income and losses generated by different development projects, as they can under current law. The proposal does prevent taxpayers from using more than $500,000 ($250,000 for singles) of active losses to offset W 2 income or portfolio income. While we believe the Senate's limits to active losses will have only a small impact on most real estate professionals, it is imperative that you talk with your CPA or tax professional, as soon as possible to understand how these proposed changes may affect your business. These changes could also impact some of your investors who are able to qualify as real estate professionals. (Click here for specific legislative text, pages 37-40.)

Expensing/Limitation to Interest Deduction - Both the House and Senate have exceptions for real estate trades or businesses.

Like-Kind Exchanges - Both the House and Senate retain LKEs for real estate.

We want to emphasize that the decision-making over the bill's final language continues to evolve and ICSC expects it will do so up until the time the vote occurs on the Senate floor. Currently a vote in the Senate is set for the week of November 27.

Finally, ICSC strongly suggests you speak with your tax advisor/tax professional and look at the implications of these or other proposals on your business. 

There is only a short amount of time to make lawmakers aware of various concerns. We will continue to provide updates as the process moves forward.

If you have any questions, please contact Phillips Hinch, ICSC VP of Tax Policy, at phinch@icsc.org.