The tax reform blueprint was published today, June 24th, and represents the House Republican Conference’s vision for comprehensive tax reform, prior to negotiations with the Senate or the White House. Heading into the November election, it is meant to provide the public with a clear understanding of how Speaker Ryan, Chairman Brady, and their House Republican colleagues want to promote economic growth through tax reform.
It has not been officially scored by the Joint Committee on Taxation, and I do not anticipate receiving anything comparable to report language or statutory language prior to the election.
Highlights relevant to Real Estate:
- Corporations: Lowers top corporate tax rate to 20%
- Pass-throughs: Creates new category for active income of sole proprietorship/pass-throughs: 25%
- “Under this new approach for taxing small businesses, sole proprietorships and pass-through businesses will pay or be treated as having paid reasonable compensation to their owner-operators.”
- Investment income: Creates new category of investment income (net capital gains, dividends, and interest) that qualifies for a 50 percent exclusion. Thus, the graduated tax rates on investment income would be 6%, 12.5%, and 16.5%.
- Expensing: Provides full and immediate expensing of investments in tangible property, intangible property, and real property (but not land)
- Business interest: Eliminates deductibility of net interest expense
- “The benefit of immediate expensing of business investment operates as a more beneficial and more neutral substitute for the deduction of interest . . . . It also eliminates a tax-based incentive for businesses to increase their debt load beyond the amount dictated by normal business conditions. A business sector that is leveraged beyond what is economically rational is more risky than a business sector with a more efficient debt-to-equity composition.”
- Losses: Net operating losses carried forward indefinitely and increased by an interest factor that compensates for inflation and a real return on capital
- Like-kind exchanges: Does not expressly address like-kind exchanges
International. Replaces current international tax rules with territorial tax system – 100% exemption for dividends from foreign subsidiaries and 8.75% tax on accumulated foreign earnings (payable over 8 year period)
- Individuals: Consolidates individual marginal tax rates into 3 brackets: 12%, 25%, and 33%
- Consolidates personal exemptions/standard deduction into larger standard deduction (maximum $24K)
- Eliminates all itemized deductions other than mortgage interest deduction and charitable contributions deduction
- Suggests additional changes to mortgage interest deduction will be made by the W&M Committee without offering any specificity
- Retains current tax incentives for retirement savings while W&M Committee works to consolidate and reform retirement savings provisions
- AMT: Repeals both the individual and corporate AMT
- Estate tax: Repeals estate and generation-skipping transfer taxes