Senate Passes Tax Reform Bill
House and Senate conference committee expected to begin this week
On Dec. 2, 2017, the Senate approved the Tax Cuts and Jobs Act (Senate-passed bill) by a vote of 51-49.
Except as described below, the provisions of the Senate-passed bill are substantially unchanged with respect to REITs and real estate investment from those items described in the Nov. 17, 2017 Nareit Alert, which summarized the bill as approved on Nov. 16, 2017, by the Senate Finance Committee (Senate Finance Committee-approved bill). The Senate Finance Committee released a summary of the Senate Finance Committee-approved bill on Nov. 29, 2017.
The Senate-passed bill includes the following changes of interest to REITs and real estate investment from the Senate Finance Committee-approved bill.
Pass-Through Business Rate Deduction Increased to 23 Percent. The Senate Finance Committee-approved bill provided that individuals could generally deduct 17.4 percent of “domestic qualified business income” of a partnership, S corporation or sole proprietorship.
Under the Senate Finance Committee-passed bill, the 17.4 percent deduction would be generally available to taxpayers, but limited to no more than 50 percent of a taxpayer's proportionate share of total wages from a partnership, S corporation or sole proprietorship in the case of taxpayers with adjusted gross income in excess of $250,000 individual / $500,000 married filing joint. A taxpayer qualifying for the full deduction would be subject to a maximum tax rate of 31.8 percent. The deduction would be applicable for taxable years beginning after Dec. 31, 2017, but would expire after 2025.
The Senate-passed bill would increase the deductible amount from 17.4 percent to 23 percent. As a result, a taxpayer qualifying for the full deduction would be subject to a maximum rate of 29.6 percent (excluding the 3.8 percent ACA surtax).
Qualified REIT dividends, qualified cooperative dividends and qualified publicly traded partnership income would not be subject to the wage test.
Up to $10,000 in Individual Property Taxes Deductible as Itemized Deductions. The Senate-passed bill conforms to the House bill in allowing individuals to deduct up to $10,000 in property taxes as itemized deductions. The Senate Finance Committee-approved bill would not have permitted an itemized deduction for property taxes.
AMT retained. The Senate Finance Committee-approved bill repeals the individual AMT and the corporate AMT. The Senate-passed bill would increase the individual AMT exemption amounts and phase-out thresholds in lieu of full repeal and retain the current corporate AMT.
International Provisions. Like the Senate Finance Committee-approved bill, the Senate-passed bill proposes moving the United States from a worldwide to a territorial tax system, with provisions included to prevent corporate base erosion. However, among other revenue-raising international provisions, the Senate-passed bill would increase the rate of the one-time tax applicable to the deferred foreign income of controlled foreign corporations from 10 to 14.5 percent for earnings and profits (E&P) comprising cash or cash equivalents and from five to 7.5 percent for remaining E&P.
Outlook. House and Senate conference committee members are expected to be appointed early this week. Thereafter, a conference committee will meet to reconcile differences between the House-passed bill and the Senate-passed bill. It is reasonable to anticipate that conferees will agree upon final bill language over the next week or so. Once conferees agree on final bill language, both the House and Senate will need to vote on the final bill before it is sent to President Trump for his signature, likely before year-end.
Nareit has been and will be actively engaged in the process and we will continue to keep you up-to-date on significant tax reform developments.