Tax Reform Bills Advance in House and Senate
The House approves its tax reform bill Senate Finance Committee approves its tax reform bill
On Nov. 16, 2017, the House of Representatives voted 227-205 to approve H.R. 1 , the Tax Cuts and Jobs Act (TCJA), with all Democrats and 13 Republicans voting against the bill. The major provisions of the House-passed bill relevant to REITs and real estate investment are substantially unchanged from those items described in the Nov. 2, 2017 Nareit Alert .
Also on Nov. 16, 2017, the Senate Finance Committee approved, by a 14-12 party-line vote, a modified version of the Senate Finance Committee chair’s original version of its Tax Cuts and Jobs Act (the Finance Committee-approved bill). The Finance Committee-approved bill also includes provisions listed in an amendment filed by Senate Finance Committee Chair Orrin Hatch (R-UT). The major provisions of the Finance Committee-approved bill are substantially unchanged from those described in the Nov. 10, 2017 Nareit Alert , other than as set forth below. The Senate Finance Committee has not yet released the bill’s actual legislative language.
The Finance Committee-approved bill includes the following changes of interest from the chairman’s original proposal.
Individual Income Tax Rate Brackets Retained; Revised Rates. The Finance Committee-approved bill proposes retaining seven tax rate brackets in combination with tax cuts that would expire in 2026.
Pass-Through Business Rate Lowered through Deduction. The original Senate proposal provided that individuals could generally deduct 17.4 percent of “domestic qualified business income” of a partnership, S corporation or sole proprietorship. The deduction was not available for individuals in service-related businesses (with an exception for lower income thresholds). For taxpayers with pass-through income from a partnership or S corporation, the deduction would be limited to no more than 50 percent of the total wages of the entity.
REIT dividends are "qualified business income."
The Finance Committee-approved bill clarified that this 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 joint. A taxpayer qualifying for the full deduction would be subject to a maximum tax rate of 31.8 percent. This deduction would be applicable for taxable years beginning after Dec. 31, 2017, but would expire after 2025.
Reduced E&P Depreciation Recovery Period for Residential Real Property. The Finance Committee-approved bill would reduce the alternative depreciation system (ADS) recovery period (that also applies for earnings and profits) for residential real property from 40 to 30 years, effective for property placed in service after Dec. 31, 2017.
International Provisions Include REIT Rules Sought by Nareit. Like the original Senate proposal, the Finance Committee-approved bill proposes moving the United States from a worldwide to a territorial tax system and would require the deemed repatriation of deferred foreign income of controlled foreign corporations. The Finance Committee-approved bill includes provisions sought by Nareit to exclude repatriated income from the REIT gross income tests. In addition, REITs would be permitted to elect to meet their distribution requirement with respect to the accumulated deferred foreign income over an eight-year period.
Outlook. Passage by the House is an important step toward enactment of a comprehensive tax reform bill. However, there remain a number of hurdles before that goal is achieved. The Senate is expected to begin floor debate the week of Nov. 27.
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 .