Senate Moves to Drastically Limit Losses of Active Business Owners

On  November 16, the U.S. House of Representatives passed its version of tax reform, the Tax Cuts and Jobs Act, by a vote of 227-205. No Democrats voted in favor of the bill, and 13 Republicans voted against it. The Senate Finance Committee also completed a markup of its version of tax reform late Thursday, November 16. The committee voted along party lines to approve the bill.  

A comparison of the House and Senate bills can be found here.

The Senate tax reform bill includes an unprecedented denial of the ability of active business owners to use excess losses (deductions from active trades or businesses over income from active trades or businesses) against other income, such as salary income, fee income, or portfolio income. This would be a material change for real estate professionals.
 
ICSC is concerned that this provision will create a disincentive to invest in real estate, causing property values to fall. It hits partnerships especially hard and would discourage entrepreneurs, start-ups and independent business owners.

This is one of the largest tax increases in the Senate bill, made without policy rationale nor hearings to examine the negative impact. Perhaps the most troubling aspect of the provision is that no transition relief is given to current active business owners.  
 
This proposal:

• Provides that excess business losses (above $500,000 for married filing jointly or $250,000 for singles) of a taxpayer other than a C corporation would not be allowed for the taxable year. They would be carried forward and treated as part of the taxpayer’s net operating loss carryforward in subsequent taxable years. Thus, even with NOLs, developers and owners would pay current tax on other sources of income and carry forward the suspended losses.  
• As currently understood, would deny the real estate professional from netting losses against REIT dividends and salary income from the same investment that caused the losses, creating an unintended “whipsaw” effect.  
• Along with another proposed change in the Senate bill that limits the NOL deduction to 80% of taxable income, makes matters even worse.  

This week’s actions mark a significant move forward in Congressional Republicans’ efforts to pass the first major overhaul of the tax code since 1986. Congressional leaders are pushing for rapid completion of the legislation so that it can be signed into law before the end of the year. While a vote by the full Senate is imminent, the House and Senate have already begun an informal process to reconcile the differences between the two bills. 

ICSC members have flown to Washington to discuss tax reform and have sent over 4,000 emails to Members of Congress. With the new proposals and fast moving action, we need to ramp up our efforts. 

Here's How You Can Help:

• Click here to send a pre-written message to Congress opposing the Limitation of Active Losses.
• Click here to learn more about the latest development and its impact via this short webinar recording, which delves into the Limitation of Active Losses provision in greater detail.
• Speak to your elected officials about this provision and its potential impact on your business. Please feel free to use the talking points below and personalize with your own experience.

Talking Points:

• ICSC is very concerned that the Limitations on Active Losses in the Senate tax proposal creates a disincentive to invest in real estate, which would cause property values to fall. It hits real estate partnerships especially hard but will also discourage entrepreneurs, start-ups and independent business owners. 
• A certain segment of investors will not buy into real estate and there would be a strong incentive to sell to get the passive losses. 
• The limits on Active Losses translate into one of the largest tax increases in the Senate bill. No policy rationale for this drastic change has been provided, nor hearings to examine the negative impact. 
• Worse, there is no transition relief provided to current active business owners!  
• History is repeating itself -- in 1986 Congress adopted passive activity loss rules at the 11th hour and without the benefit of public input. The passive loss rules devastated the real estate markets for years and deepened the Savings and Loan crisis.