Real Estate Developer Forum 2017 Tax Reform and Impacts on Real - - PowerPoint PPT Presentation
Real Estate Developer Forum 2017 Tax Reform and Impacts on Real Estate Sponsored by: Baker Hostetlers Tax Credit Finance and Economic Development Incentives Team Co-leaders: Alexander Szilvas and Nathan Ware Presenters: Hon. Michael
Presenters: Hon. Michael Ferguson, Jeffrey Paravano, Alexander Szilvas, Nathan Ware, Edward Ptaszek, Jr., Michelle Hervey, Christina Novotny and Lucas Witters May 9, 2018
Sponsored by: Baker Hostetler’s Tax Credit Finance and Economic Development Incentives Team
Co-leaders: Alexander Szilvas and Nathan Ware
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services in Congress, Trump Administration
Energy and Commerce Committee
services policies Contact Mike: (202) 861-1663 mferguson@bakerlaw.com
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Jeff Paravano has a broad-based tax practice involving tax controversy and tax litigation; corporate, partnership, and venture capital transactions; and domestic and cross-border tax planning. He also represents clients' interests before enforcement
also serves as Managing Partner of BakerHostetler's Washington, D.C., office and previously served as firmwide Chair of the firm's Tax Group, which is among the largest law firm tax practices in the United States. Before returning to the firm from Treasury in 2003, Jeff served as Senior Advisor to the Assistant Secretary, Tax Policy, at the United States Department of Treasury. jparavano@bakerlaw.com (202) 861-1770
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titles II and V of the concurrent resolution on the budget for fiscal year 2018”
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C Corporation Pass-through Entity-level tax on $100 $21.00 n/a Tax on net distribution ($79) $15.80 n/a Individual tax on income n/a $37.00 Effect of QBI deduction (20%
n/a ($7.40) Net Investment Income Tax $3.00 $3.80 Total Tax Burden $39.80 $33.40 Without QBI Deduction $40.80
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C Corporation Pass-through Entity-level tax on $100 $21.00 n/a Individual tax on income n/a $37.00 Effect of QBI deduction (20% of 37%) n/a ($7.40) Net Investment Income Tax $-0- $3.80 Cash Distributed to Pay Taxes $-0- $33.40 Reinvested Cash $79.00 $66.60
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– 20% of accumulated taxable income – Intended to discourage corporations from retaining earnings without a business purpose, solely to avoid shareholder-level tax
– 20% of undistributed personal holding company income – Imposed on certain types of undistributed passive income earned by a closely held C corporation
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– Applies to losses arising in taxable years beginning after 12/31/17
– Limited exception for certain farming losses – Exception for property and casualty insurers – Applies to losses arising in taxable years ending after 12/31/17
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– Taxable income: losses/deductions will offset qualifying income – Not applicable to reasonable compensation or guaranteed payments for services – Not applicable to specified service business – Limitations based on wages paid or property
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– 20% of QBI, subject to limitations
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payments for services with respect to the trade or business
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– 50% of W-2 wages with respect to qualified trade
– 25% of W-2 wages, plus 2.5% of unadjusted basis
after acquisition
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– 10 years after placed in service, or – Applicable recovery period under Section 168 (disregarding ADS)
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Retailer:
for $3 million deduction
– $16 million W-2 wages – $500,000 qualified property – Limited to greater of:
$12,500 property = $4,012,500
Real Estate Company:
$3 million deduction
– $1 million W-2 wages – $100 million qualified property – Limited to greater of:
$2,500,000 property = $2,750,000
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199A 461(l) Year 1 QBI loss ($750,000) ($750,000) QBI deduction
business loss ($500,000) Carryover to year 2 ($750,000) ($250,000) Year 2 QBI $2,000,000 $2,000,000 Eligible for QBI deduction $1,250,000 Taxable business income $1,750,000
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New Gain Deferral and Potential Exclusion Opportunity
property to an unrelated person to the extent the amount of such gain is reinvested in a “qualified opportunity fund” within 180 days of the sale.
– General Rule – 100% of the deferred gain shall be included in the taxpayer’s gross income the earlier of: (i) the date the investment is sold; or (ii) Dec. 31, 2026. – Reduced Gain Options
the gain is permanently excluded from gross income.
the gain is permanently excluded from gross income.
post-acquisition appreciation is excluded from gross income.
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(“LIC”) census tract that is:
– Designated as such by the governor* of the State in which the census tract is located by March 21, 2018 (subject to 30-day extension); and – Certified by the Secretary of the Treasury within 30 days (subject to 30-day extension) of the governor’s notification.
for new markets tax credits.
LIC “contiguous” tracts which meet the following requirements:
– Contiguous to a LIC that is also designated as a QOZ; and – Median family income of the tract does not exceed 125% of the median family income of the contiguous LIC.
* For Washington D.C., the designation would be made by the mayor.
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Alabama Michigan South Carolina American Samoa Mississippi South Dakota Arizona Missouri Texas California Nebraska Vermont Colorado New Jersey Virgin Islands Delaware Northern Marianas Islands Wisconsin Georgia Ohio Idaho Oklahoma Kentucky Puerto Rico
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period after acquisition, additions to basis exceed an amount equal to the basis the property at beginning
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following requirements:
– A trade or business in which substantially all of taxpayer’s tangible property is “qualified opportunity zone business property;” – At least 50% of taxpayer’s gross income is derived from such trade or business; – Substantial portion of taxpayer’s intangible property is used in such business; – Less than 5% of the average of the aggregate unadjusted bases of its property is attributable to “nonqualified financial property;” and – Business is not a “sin business” (e.g., golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack gambling facility, or any store the principal business of which is the sale of alcohol for consumption off premises).
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placement in service.
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– Property must be owned or leased by “taxpayer” during entire period after December 31, 2017; and – 24 or 60-month rehabilitation period must begin not later than 180 days after enactment of the Act.
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– Prior to Tax Reform, on October 31, 2017, CDFI Fund updated its source for determining NMTC-eligible census tracts from the 2006-2010 ACS data to the 2011-2015 ACS data.
– QLICIs closed before Oct. 31, 2017 must use the 2006-2010 ACS data. – QLICIs that close between Oct. 31, 2017 and Oct. 31, 2018 may use either data source. – QLICIs that close after Nov, 1, 2018 must use the 2011-2015 ACS data.
**Importance – Double-check that your census tract still qualifies.
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– Targets multi-national corporations that shift profits overseas; – Only applies if:
axpayer’s average annual gross receipts over last 3 years is at least $500 million; and
axpayer has a certain “base erosion percentage”
– If taxpayer meets above thresholds, it pays higher of regular tax liability or BEAT.
– Certain tax credits reduce a taxpayer’s regular tax liability when determining the applicability of the BEAT, making it more likely such taxpayer will be subject to the BEAT. – To the extent tax credits reduce regular tax liability and subject the taxpayer to the BEAT, such tax credits are lost forever.
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– Reduced by 100% of:
– Reduced by up to 20% of:
tax liability by up to 100%.
** As a result of the above, investor demand for certain of these credits may decline, which may result in a negative effect on pricing.
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2017; or
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– Exchanges of “businesses” effectively eliminated. – Ability to exchange certain identifiable intangible assets (e.g., trademarks, trade names, certain other customer- based intangibles) eliminated. – “LKE Programs” for rolling exchanges of personal property (e.g., vehicle or equipment leasing companies) eliminated.
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– Rules are very liberal as to what qualifies as “like kind” in the real property context – For example, the following real property interests would generally be considered “like kind” to each other:
enancy-in-common interest in real property
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– Opportunity to defer 100% of realized gain indefinitely. – Cash reinvestment requirement is generally based on net proceeds received (i.e., not taxable gain). – Ability to acquire existing like-kind real property (without any requirement to further improve).
– Only applies to gain on the sale of real property. – Reinvestment must be into “like kind” real property. – Fair market value (“FMV”) of replacement property must be at least equal to the FMV of the relinquished property (in order to defer 100%
– T axpayer must structure sale to avoid actual or constructive receipt of cash sales proceeds.
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Opportunity Zone
– Applies to gains on the sale of any property (i.e., broader application). – Ability to reinvest into “non-like kind” property. – Taxpayer is not disqualified from program by actual or constructive receipt of cash (i.e., 180 days to reinvest after sale). – Ability to permanently exclude modest portion of gain after 5 and 7 years of holding. – Ability to permanently exclude post-acquisition appreciation from being taxed in long-term hold situations.
– Gain on sale of relinquished property can only be deferred until 2026. – Because reinvestment requirement is based on taxable gain, taxpayer could have to reinvest more cash than what received in sale. – Reinvestment must be in a QOZ. – As new program, still lack of guidance on numerous issues.
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– Eliminated old categories of (i) qualified leasehold improvement property; (ii) qualified restaurant property; and (iii) qualified retail improvement property. – Retained “qualified improvement property” (“QIP”) category of property, but eliminated it as a special category of property eligible for bonus depreciation because intent was for it to qualify on its own now as 15-year property. – Changed ADS life for residential property from 40 years to 30 years. **Important Issues – While QIP was intended to be given a 15- year recovery period and 20-year ADS life, the legislative language drafted did not accomplish this.
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– Definition – Any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the building was first placed in service.
structural framework.
– Definition intended to include old categories of: (i) qualified leasehold improvement property; (ii) qualified restaurant property; and (iii) qualified retail improvement property. – Eligible for Section 179 expensing and was intended to be eligible for new 100% bonus depreciation.
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– Increased annual limit from $500,000 to $1 million. – Increased phase-out from $2 million to $2.5 million. – Property eligible for Section 179 expanded to:
following:
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issue associated therewith.)
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Period Qualified Property Longer Production Period Property and Certain Aircraft
100 percent 100 percent
2023
80 percent 100 percent
2024
60 percent 80 percent
2025
40 percent 60 percent
2026
20 percent 40 percent
2027
None 20 percent
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Bonus Depreciation percentage phase-out schedule for property acquired and placed in service after Sept. 27, 2017:
Placed in Service Qualified Property Longer Production Period Property and Certain Aircraft
50 percent 50 percent
2018
40 percent 50 percent
2019
30 percent 40 percent
2020
None 30 percent
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Bonus Depreciation percentage phase-out schedule for property acquired before Sept. 28, 2017, but placed in service after Sept. 27, 2017:
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– Excludes all items not allocable to a trade or business. – Approximates EBITDA for tax years beginning before
– For tax years beginning after Jan. 1, 2022, determined net of depreciation, amortization, and depletion. * Limitation increased for “floor plan financing interest” for automobiles and certain other “motor vehicles” held for sale
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* After applying aggregation rules of IRC § 448(c)(2).
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“applicable partnership interest” shall be re-characterized as short-term capital gain to the extent property triggering the LTCG (i.e., partnership interest or underlying partnership property) was not held for more than 3 years.
– Exception – Not applicable to gain attributable to an asset not held for portfolio investment on behalf of a third party investor.
– General Definition – Any interest in a partnership transferred in connection with the performance of substantial services in an “applicable trade or business.” – Exceptions
interest.
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– Exception – In the case of a charitable contribution of appreciated property by a partnership, a partner’s distributive share of the contribution that represents the excess of the property’s fair market value over its adjusted tax basis is not limited by the partner basis limitation.
– Easement must be a “qualified real property interest;” – Grantee must be a “qualified organization;” and – Donation must be considered to have been made “exclusively for conservation purposes.”
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transactions are now considered listed transactions subject to specific disclosure on IRS Form 8886.
– Promotional Materials – Prospective investor must receive “promotional materials” for investment. – Structure – Investor purchases an interest in a partnership that holds real property and then encumbers that real property with a conservation easement. – Amount of Deduction –As a result of that conservation easement, the investor is allocated a charitable deduction in an amount that is at least 2 ½ times its investment.
January 1, 2010 unless statute of limitations for assessment for the tax year during which the transaction occurred ended on or before
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TEFRA Examinations
excluded absent affirmative election in
partners
as representative
contest assessments BBA Examinations
absent affirmative election out
deficiencies absent push out election to affected partners
broader powers
petition
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– Increase in tax if adjustments made in reviewed year; plus – Increase in tax in intervening years due to adjustments in tax attributes.
– Permits multi-tier push out, push out of favorable adjustments – “Pull in” option: similar to limited scope amended partner returns, but doesn’t require filing amended return and
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Stay Out
joint ventures with low risk
unplanned transfers of interests
BBA
void ab initio absent approvals Be Prepared
appropriate
retains ability to determine appropriate course of action (pay, push out, or other) based on assessment
amend or pull in adjustments where appropriate
transferring partners, including lower-tier adjustments
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Alexander J. Szilvas Baker & Hostetler LLP Key Tower 127 Public Square, Suite 2000 (216) 861-7883 aszilvas@bakerlaw.com Michelle M. Hervey Baker & Hostetler LLP Key Tower 127 Public Square, Suite 2000 (216) 861-7290 mhervey@bakerlaw.com Nathan F. Ware Baker & Hostetler LLP Key Tower 127 Public Square, Suite 2000 (216) 861-7427 nware@bakerlaw.com Christina Novotny Baker & Hostetler LLP Key Tower 127 Public Square, Suite 2000 (216) 861-7295 cnovotny@bakerlaw.com Edward G. Ptaszek, Jr. Baker & Hostetler LLP Key Tower 127 Public Square, Suite 2000 (216) 861-7497 eptaszek@bakerlaw.com Lucas L. Witters Baker & Hostetler LLP Key Tower 127 Public Square, Suite 2000 (216) 861-7068 lwitters@bakerlaw.com
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These materials have been prepared by Baker & Hostetler LLP for informational purposes only and are not legal advice. The information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. You should consult a lawyer for individual advice regarding your own situation.