The Senate voted early Saturday morning to pass its version of the Tax Cuts and Jobs Creation Act. The vote was 51-49 along party lines. Senator Bob Corker (R-TN) was the only Republican to vote against the bill due to his concerns about adding to the budget deficit.
We are still analyzing the nearly 500 pages of legislative text. Generally, the Senate’s tax reform bill follows the broad contours of the measure that was reported out of the Senate Finance Committee on November 16 by providing permanent tax relief – including a significantly lower top rate of 20 percent – for corporations and temporary tax relief for individuals and pass-through entities, with those costs offset in part by eliminating or paring back dozens of current-law deductions, credits, and incentives.
The individual tax rates would also be reduced modestly but would not materially improve for non-corporate real estate owners. The top individual tax rates would be reduced modestly from 39.6 to 38.5 percent. The long-term capital gains rate remains at 20 percent and the Obamacare net investment income tax of 3.8% was also untouched.
Like the House version, the legislation preserves critical tax provisions for commercial real estate such as interest deductibility and like-kind exchanges. The period of time required for a carried interest to receive the lower long-term capital gains rates was increased from 1 to 3 years. Given President Trump’s push to end carried interest altogether, ICSC mobilized its members to help lawmakers better understand the importance of carried interest for the commercial real estate industry. While the 3-year holding period is not ideal, it is a workable compromise. An amendment to end the carried interest entirely was offered by Sen. Tammy Baldwin (D-WI), but was defeated.
During the amendment process the Senate increased its deduction for pass-through businesses (e.g., partnerships and LLCs) from 17.4 to 23 percent of qualified business income. The application of the deduction is rather complex and will limit its applicability for many commercial real estate firms and service providers (such as architects and brokerages). Specifically, for pass-through business owners with more than $500,000 (married)/$250,000 (all others) of taxable income, the deduction is limited to no more than 50 percent of the W-2 wages paid by the firm. Most commercial real estate companies rely on contractors, rather than employees, and will be unable to significantly utilize the deduction.
Senators adopted the House’s treatment the State and Local Tax (SALT) deduction, which allows individuals to deduct up to $10,000 of their property taxes. State and local taxes paid as part of running a business would still be deductible for corporations and pass-throughs (on schedule C, E, or F).
While the House bill would repeal the estate tax deduction, the Senate roughly doubles the basic exemption amount to approximately $11 million for individuals, $22 million for couples (effective 1/1/2018).
The bill would expand Section 179 expensing to include heating and air conditioning systems, fire and alarm systems, and nonresidential roofs, as well as increase the maximum amount that can be expensed to $1,000,000 and increase the phase-out threshold to $2,500,000.
Whereas the House version repeals the Historic Rehabilitation tax credit, the Senate only ends the 10-percent credit. The 20-percent historic tax credit would be claimed gradually over five years. In addition, the Senate bill would retain private activity bonds, but income for advance refunding could no longer be excluded from income.
NEXT STEPS
The Senate and House must now reconcile the differences between their two bills (a comparison can be found here).
There are two possible next steps: 1.) Members of the House and Senate convene a formal conference committee. The final product that emerges is then voted upon by both chambers; or 2.) The House simply yields to the Senate version. This second option presents a quicker resolution, with only the House having to vote. We expect the reconciliation process to begin this week.
ICSC wants to thank you for responding to its various alerts to shape the outcome of tax reform. More than 7,000 emails were sent to the House and Senate during the past few weeks. Your emails and calls helped stave off attempts to make the carried interest and active loss limitations provisions more severe. There is nothing like hearing from constituents and your actions had a very beneficial effect.
Phillips Hinch
Vice President, Tax Policy