"Big Six" Tax Reform Framework Proposes Corporate and Individual Rate Reductions but Leaves Details and Most Offsets for Tax-Writing Committees
Today, the Trump Administration and House and Senate Republican Leadership released a “Unified Framework for Fixing Our Broken Tax Code” (the Framework), along with a one-page summary of the Framework.
Set forth below is a summary of the Framework provisions of potential interest to REITs and the broader real estate industry.
- Does not specifically address the tax treatment of REITs or REIT shareholders.
- Proposes a reduced maximum corporate income tax rate of 20% and the possibility of corporate integration. The Framework proposes reducing the maximum corporate tax rate from 35% to 20%. The Framework notes that it “aims” to eliminate the corporate AMT. Additionally, the Framework states that “[t]he committees also may consider methods to reduce the double taxation of corporate earnings.”
- “Small business” maximum pass-through income tax rate of 25%. For “small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations,” the Framework’s maximum tax rate for “business income” would be 25%. “Business income” is not defined and it is not clear whether it would include real estate-related income earned by a passive limited partner in a real estate partnership. Further, the Framework does not provide any specificity on the definition of “small and family-owned businesses.” The Framework “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.” NAREIT believes that any lower rate that a real estate limited partner achieves in tax reform will equally apply to REIT shareholders when the REIT invests in similar real estate as the partnership.
- Proposes a partial limitation on the deduction for net interest expense incurred by C corporations.The Framework states that “[t]he committees will consider the appropriate treatment of interest paid by non-corporate taxpayers.” The Framework does not address whether a REIT would be considered a corporate or non-corporate taxpayer for purposes of this partial limitation, but NAREIT believes that REITs will be considered pass-through entities under any such limitation.
- Proposes immediate expensing (“for at least five years”) of new investments made after September 27, 2017 in depreciable assets other than structures. Unlike the House Blueprint released in June 2016 that would have permitted the expensing of structures, the Framework does not address the cost recovery period for buildings or land. The Framework notes that “[t]his policy represents an unprecedented level of expensing with respect to the duration and scope of eligible assets. The committees may continue to work to enhance unprecedented expensing for business investments, especially to provide relief for small businesses.”
- Consolidates individual income tax rates to three brackets of 12, 25 and 35%. The Framework would reduce the current maximum individual income tax rate from 39.6% (not including the Medicare surtax of 3.8%) to 35% and would consolidate the current seven tax brackets to three brackets of 12, 25 and 35% (all of which would be indexed for inflation).
- Unlike the Blueprint, the Framework does not address the individual income tax rate applicable to dividends, capital gains and interest. The Blueprint effectively proposed an individual income tax rate of 16.5% for dividends, capital gains, and interest. The Framework does not address the specific rate applicable to dividends, capital gains and interest.
- Proposes repealing the individual alternative minimum tax (AMT) while suggesting an additional top income tax rate. Although the Framework proposes repealing the existing AMT, it notes that “[a]n additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”
- Proposes retaining “tax incentives” for mortgage interest and charitable contributions and eliminating most itemized deductions. The Framework “envisions” repealing many other individual exemptions, deductions and credits, as well as the estate and generation-skipping transfer taxes. The Framework does not specifically address the state and local tax deduction for individuals, but it is widely believed to be at risk.
- Does not address the like-kind exchange rules.
- Mostly unidentified business “special exclusions and deductions” and business credits would be repealed or restricted. The Framework would explicitly preserve the research and development and low income housing tax credits. However, it “envisions” repeal of other credits, while “the committees may decide to retain some other business credits to the extent that budgetary limitations allow.”
- Proposes a territorial tax system, one-time repatriation toll charge, and potential “corporate base erosion” rules. The Framework proposes moving from a worldwide system of taxation to a so-called “territorial” system by exempting foreign profits from tax when they are repatriated to the U.S. To transition to this system, the Framework would impose one tax rate on deemed repatriated accumulated foreign earnings to the extent held in cash or cash equivalents, and a lower tax rate on accumulated foreign earnings in illiquid assets. Companies would be entitled to pay the relevant tax liability over several years. In addition, the Framework “includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.”
President Trump has made tax reform his number one priority following Congress’s failure to repeal and replace Obamacare. While the President and Republican Leadership have expressed interest in bipartisan tax reform, doing so would require a 60-vote majority in the Senate to enact legislation. As a result, they are moving forward with the so-called fast-track “reconciliation” process, which only requires a 50-vote majority in the Senate. The reconciliation process requires both House and Senate to agree on concurrent budget resolution for Fiscal Year 2018, which they have not yet been able to do. Specifically, Senate Republicans have indicated that they have an agreement to allow for tax reform with $1.5 trillion of tax cuts over 10 years while the House Budget Committee’s instructions require deficit-neutral tax reform and roughly $200 billion in deficit reduction.
The Framework was developed jointly by the Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Committee Chairman Orrin Hatch (R-UT), House Speaker Paul Ryan (R-WI), House Ways and Means Committee Chairman Kevin Brady (R-TX), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn (the Big Six), and it builds upon the House Republican “Better Way” Blueprint, released in June 2016 (the Blueprint), the Trump Administration’s “2017 Tax Reform for Economic Growth and American Jobs” Statement of Principles released in April 2017 (the Statement of Principles), and the Big Six’s Joint Statement on Tax Reformreleased in July 2017 (the Statement on Tax Reform).
NAREIT looks forward to continuing to work closely with policymakers to make certain that tax reform legislation appropriately reflects the important role of REITs and REIT-based real estate investment.