Category: News

Roundtable and Business Coalition Seek Administrative Relief, Shorter Cost Recovery Period for Nonresidential Real Estate Improvements

Posted on by Trey Jackson

This week The Real Estate Roundtable, along with 239 businesses and trade groups, wrote to Secretary Mnuchinurging the Treasury Department to provide taxpayers with administrative relief from a drafting mistake in last year’s tax overhaul that increased the cost recovery period for qualified improvement property (QIP).

This week, The Real Estate Roundtable, along with 239 businesses and trade groups,  wrote to Secretary Mnuchin  urging the Treasury Department to provide taxpayers with administrative relief from a drafting mistake in last year’s tax overhaul that increased the cost recovery period for qualified improvement property (QIP).

  • The drafting error in the tax law has resulted in a significantly longer 39-year cost recovery period for new, qualified nonresidential interior improvements.  The intent of Congress was to allow the immediate expensing of QIP – or provide a 20-year recovery period in the case of taxpayers electing out of new limitations on the deductibility of business interest. 
  • In the Oct. 9 letter to Secretary Mnuchin, the coalition addressed the need for a QIP correction, along with the unintended consequences if action is not taken.  The letter raised concerns that the drafting error is resulting in “[d]elays in store and restaurant remodeling projects,” “[b]usinesses refraining from purchasing or leasing vacant stores or other leasehold spaces that require improvements,” and “[l]oss of construction jobs associated with commercial renovation projects.”  
  • The coalition letter was sent in response to the Administration’s request for comments on newly proposed regulationsimplementing the additional first year depreciation deduction (immediate expensing) benefit.  The coalition submission also included two recent letters—one from 16 Democratic Senators to Treasury Secretary Steven Mnuchin and the other from 58 House Republicans to GOP leadership—reiterating the importance for policymakers to correct this unintentional drafting mistake in last year’s legislation, while recommending that Treasury should issue interim guidance and refrain from enforcing the drafting error.  (House Letter, Oct 2 and Senate Letter, Sept 24)
  • The Real Estate Roundtable and a broad-based business coalition urged Secretary Mnuchin in August to issue guidance clarifying certain provisions included in tax overhaul legislation enacted last year – including the cost recovery period for qualified improvement property. (Coalition letter, Aug. 22)

Congress could address the issue during the lame duck congressional session between the mid-term election and January. Senate Republican Conference Chairman John Thune (R-SD) said GOP lawmakers are motivated to address a number of tax issues that are outstanding, including tax reform technical corrections and expired tax provisions. (The Hill, Oct. 11)

 

Fed Chairman Testifies to Congress on Interest Rates; Banks Concerned About CRE Lending Risk

Posted on by Trey Jackson

In testimony before Congress this week, Federal Reserve Chairman Jerome Powell testified about interest rates and monetary policy.  “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate,” Powell told the Senate Banking Committee on Tuesday. 

In testimony before Congress this week, Federal Reserve Chairman Jerome Powell testified about interest rates and monetary policy.
  • After the Fed raised short-term U.S. rates twice in the first half of 2018, it is expected to issue two more increases this year, starting in September.  (MarketWatch, July 17 and Wall Street Journal, July 19)
  • In Chairman Powell’s Senate testimony, he said the Fed expects, with appropriate monetary policy, that the job market will remain strong and inflation will stay near two percent over the next several years.  He added that the Fed’s economic forecast faces the uncertain impact of trade policies and tax legislation. “It is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy,” Powell testified.  
  • The Fed yesterday released its “Beige Book” of current economic conditions, which notes the effects of newly-imposed tariffs: “Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies. Tariffs contributed to the increases for metals and lumber.” According to the report’s national summary commercial real estate markets show stable or improving growth.  (Reuters, July 18 and GlobeSt, July 19)   
  • During the House Financial Services Committee on Wednesday, Powell also commented on CRE asset pricing.  “Broadly speaking, commercial real estate prices are in the upper range, I think, generally elevated. I wouldn’t use the bubble word here, but I would say that many financial asset prices are elevated above their normal ranges.”
  • According to a July 16 Financial Times article, U.S. banks are increasingly concerned about the effects of rising interest rates on CRE lending, with executives saying they are worried about an overheated market.  “US bankers have warned about mounting risks in commercial real estate, with figures showing they are putting the brakes on loans to buyers of office buildings, hotels and shopping malls,” the Times reports. 

The effects of monetary policy and tax legislation on commercial real estate will be a focus of The Roundtable’s September 26 Fall Meeting in Washington, DC.

New Federal Opportunity Zones Profiled in Q&A with Roundtable Staff; House Speaker Ryan Touts Benefits of Investment Program

Posted on by Trey Jackson

A new federal “Opportunity Zones” investment program – and its potential to boost job creation, entrepreneurship, and economic development in low-income communities – is the focus of a July 16 GlobeSt.com interview with Real Estate Roundtable President & CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick.  With implementation guidance about the program expected soon from the U.S. Department of the Treasury, the article highlights the major tax considerations and regulatory questions for real estate, many of which are discussed in greater detail in The Roundtable’s June 28 Opportunity Zone comment letter.

     Roundtable President & CEO Jeffrey DeBoer, right, and Roundtable SVP and Counsel Ryan McCormick, left, discussed the new federal “Opportunity Zones” investment program in a  July 16 GlobeSt.com interview.

  • Last month, the Treasury Department formally designated more than 8,700 low-income census tracts in the United States, Puerto Rico, and territories as qualified Opportunity Zones. (IRS Notice 2018-48 and Roundtable Weekly, June 22)
  • DeBoer explained in the GlobeSt interview, “The point of the program is to encourage capital formation and patient, long-term investment in these areas by reducing or eliminating capital gains taxes for taxpayers investing in newly established Opportunity Funds.”
  • McCormick told GlobeSt that property in an Opportunity Zone – real estate or otherwise – must be acquired by the fund after Dec. 31, 2017.  He added, “The law delegated many of the key implementation issues to the Treasury Department to resolve. These include: (1) how an Opportunity Fund is certified (2) how quickly must an Opportunity Fund deploy new capital, and (3) when has an existing real estate asset qualified as an eligible investment?”
  • A July 13 Wall Street Journal article on Opportunity Zones reported, “Unlike earlier federal efforts to spur economic development in poorer communities, the program takes a free-market approach and isn’t backed with federal spending.”
  • House Speaker Paul Ryan (R-WI) on July 12 spoke at length regarding the program before the Economic Club of Washington.  “With these opportunity zones, we are essentially offering private investors a set of incentives. The longer you maintain your investment in these areas, the more tax benefits you receive.  Right now, we have $6 trillion of unrealized capital that can be deployed to help alleviate poverty in distressed communities and improve people’s lives,” Ryan said.
  • DeBoer also noted in the GlobeSt interview, “Investors and real estate fund managers are actively in the process of evaluating options, setting up funds, and conducting due diligence.  As time passes and the regulatory regimes takes shape, the pool of Opportunity Fund investors may grow.  We anticipate Treasury will soon issue guidance, hopefully within the next 30 days.”

The Roundtable Tax Policy Advisory Committee (TPAC) recently convened a panel on Opportunity Zones that included the tax counsel for Senator Tim Scott (R-SC), the original author and sponsor of Opportunity Zone legislation.  TPAC’s Opportunity Zone Working Group will continue to provide insight into how the industry can help the program fulfill its ambitious objective of stimulating economic development and job creation. (Roundtable Comment Letter, June 28)

Ventas’ Debra A. Cafaro is New Chair of FY2019 Roundtable Board of Directors

Posted on by Trey Jackson

The Real Estate Roundtable has elected Debra A. Cafaro (Chairman and Chief Executive Officer, Ventas, Inc.) as its new Chair for a three-year term starting July 1, 2018.  She succeeds William C. Rudin (Co-Chairman and CEO, Rudin Management Company, Inc.).  The Roundtable’s membership also approved a 23-member Board of Directors for its 2019 fiscal year (July 1, 2018 – June 30, 2019).

Left to Right: Roundtable President and CEO Jeffrey D. DeBoer; Roundtable Chair Debra A. Cafaro (Chairman and Chief Executive Officer,  Ventas, Inc  .); and Immediate Past Roundtable Chair William C. Rudin (Co-Chairman and CEO,  Rudin Management Company, Inc  .) 

– enlarge photo –  
  • Ms. Cafaro leads Ventas, Inc., an S&P 500 company and real estate investment trust with a portfolio of more than 1,200 seniors housing, healthcare and research properties in the United States, Canada and the United Kingdom.
  • “For two decades, The Real Estate Roundtable has taken a non-partisan approach aimed at providing practical policy solutions to lawmakers in DC,” Cafaro said.  “I intend to carry this approach forward, by continuing to shape and articulate a unified real estate industry perspective for policymakers, and as the first woman elected to this role, to showcase the diversity of our highly respected membership on national public policies.” 
  • The Roundtable’s Immediate Past Chair William Rudin noted, “I was honored to serve as the Roundtable Chair the past three years and pleased that Debra will succeed me.  She has an incredibly successful background, a sterling reputation, and the positive skills and qualities needed to successfully prioritize and advance the real estate industry’s policy agenda in Washington.” 
  • Roundtable President and CEO Jeffrey D. DeBoer said, “The Roundtable now begins our 20th year of bringing together the leaders in our industry with the major industry trade associations to work positively with national lawmakers on policy issues related to our industry and the overall economy.  Our past success has been directly related to our high quality membership, our fact-based, nonpartisan problem-solving approach to policy issues, and the collective work with the overall industry. We look forward to Deb Cafaro as our new Chair, not only to carry on our traditional approach to Washington, but also to lead The Roundtable to a new, enhanced level of effectiveness.”
  • Also joining The Roundtable’s Board of Directors as of July 1 are: 
    · Thomas J. Baltimore, Jr., Chairman, President and CEO of Park Hotels & Resorts and Chair, Nareit®;
    · Tray E. Bates, CCIM SIOR CIPS, Principal, Bates Commercial LLC and Former Commercial Committee Chair, National Association of Realtors®; 
    · Steven Hason, Managing Director and Head, Americas Real Estate & Infrastructure, APG Asset Management US Inc. and Chairman, Pension Real Estate Association; 
    · Kathleen McCarthy, Global Co-Head of Blackstone Real Estate, Blackstone; and 
    · Tara L. Piurko, Partner, Miller Thomson LLP and President, CREW Network.  

    See the complete list of the FY2019 Roundtable’s Board of Directors here. 

  • Stepping down from The Roundtable Board as of July 1 are: 
    · Kenneth F. Bernstein, President & Chief Executive Officer, Acadia Realty Trust and Immediate Past Chairman, International Council of Shopping Centers; 
    · Kevin Faxon, Managing Director – Head of Real Estate, Americas, J.P. Morgan Asset Management and Immediate Past Chairman, Pension Real Estate Association; 
    · Timothy J. Naughton, Chairman, CEO and President, AvalonBay Communities, Inc and Immediate Past Chair, Nareit®; and 
    · Robert S. Taubman, Chairman, President & CEO, Taubman Centers, Inc., and Chair Emeritus, The Real Estate Roundtable.

Treasury Designates More than 8,700 Census Tracts as Opportunity Zones

Posted on by Trey Jackson

The Treasury Department on June 20 designated more than 8,700 low-income census tracts in the United States, Puerto Rico, and territories as qualified Opportunity Zones. (IRS Notice 2018-48)

A Roundtable Tax Policy Advisory Committee working group is finalizing a comment letter to the Treasury Department and IRS with recommendations on how to structure implementing rules that facilitate productive real estate investment.

  • Congress created the Opportunity Zone tax incentive program in the Tax Cuts and Jobs Act. Incentives reward Opportunity Fund investors with a capital gains deferral or exclusion on their invested capital in low-income communities.
  • Opportunity Funds must invest in tangible business property located in a qualifying zone, which can include real estate, and the tax benefits are tied to the investment holding period.  The capital gain on an Opportunity Fund investment is excluded from tax altogether if the asset is held for 10 years or more. (Opportunity Zones: An Innovative Investment Vehicle Created by the TCJA , Accounting Today, June 6, 2018).
  • Real estate investment aligns with the underlying objectives of the Opportunity Zone program – job creation, infrastructure development and growth in the tax base supports local public services. 
  • Opportunity Zones were the topic of a panel discussion at The Roundtable’s Tax Policy Advisory Committee (TPAC) meeting last week. Speakers included Shay Hawkins, Tax Counsel for Senator Tim Scott (R-SC), the original author or Opportunity Zone legislation. Treasury’s Tax Legislative Counsel Tom West also addressed a number of questions related to Opportunity Zones. 

A TPAC working group is finalizing a comment letter to the Treasury Department and IRS with recommendations on how to structure implementing rules that facilitate productive real estate investment.  The letter will address topics such as the Opportunity Fund certification process, the requirements necessary for real estate to be treated as a qualified Opportunity Zone investment, and the tax consequences of real estate asset sales and acquisitions by an Opportunity Fund during the holding period.

Roundtable Comment Letter Addresses Productive Real Estate Investment in New Opportunity Zones

Posted on by Abigail Grenadier

The Real Estate Roundtable on Thursday provided formal comments to Treasury Department and IRS officials regarding implementation guidance that could maximize real estate investment, capital and jobs into newly designated Opportunity Zone communities.  Last week, the Treasury Department formally designated more than 8,700 low-income census tracts in the United States, Puerto Rico, and territories as qualified Opportunity Zones. (IRS Notice 2018-48 and Roundtable Weekly, June 22)

The Real Estate Roundtable provided  formal comments  regarding implementation guidance for newly designated Opportunity Zone communities.

  • “Real estate development and redevelopment is a key component of any region’s economic strength and growth,” wrote Roundtable President and CEO Jeffrey DeBoer.  “In our view, successful implementation of the Opportunity Zone program requires careful consideration of how the new rules will apply to real estate and real estate investment activities.” 
  • The Roundtable comments focus on: the certification of Opportunity Funds; the deferral or exclusion of gain; and the Opportunity Fund asset test, including questions regarding when real estate improvements constitute a qualified investment.
  • Congress created Opportunity Zones in the Tax Cuts and Jobs Act to encourage long-term, capital investment in economically struggling, low-income communities.  Opportunity Funds must invest in tangible business property located in a qualifying zone, which can include real estate, and the tax benefits are tied to the investment holding period.  The capital gain on an Opportunity Fund investment is excluded from tax altogether if the asset is held for 10 years or more.

The Roundtable comments are the product of The Roundtable Tax Policy Advisory Committee (TPAC) Opportunity Zone Working Group.  TPAC recently convened a panel on Opportunity Zones that included the tax counsel for Senator Tim Scott (R-SC), the original author and sponsor of Opportunity Zone legislation.

“Building Success” Reports on The Roundtable’s FY2018 Policy Activities in Tax, Capital and Credit, Homeland Security, Energy and Infrastructure Issue Areas

Posted on by Trey Jackson

The Real Estate Roundtable has released its FY2018 Annual Report “Building Success,” which reports on the organization’s policy activities from July 1, 2017 to June 30, 2018 and outlines its policy priorities for the coming year.

  • “We are extremely proud of our success this past year and equally eager to build on its foundation as we move into our new fiscal year. As always, we will continue to inform lawmakers with consistent and credible policy analysis that encourages economic growth, job creation, and a healthy national real estate market,” said Roundtable President and CEO Jeffrey D. DeBoer.
  • Immediate Past Roundtable Chair (2015-2018) William C. Rudin (Co-Chairman and CEO, Rudin Management Company, Inc.) noted the continued efforts of promoting greater diversity throughout the organization and his efforts during his tenure as Chair. “We have made measurable progress at identifying and recruiting more highly qualified women and people of color to join, and participate at The Roundtable. With greater membership diversity, we ensure that our decisions are better informed and more sustainable.”

The Report includes summaries showing continued progress on the policy front, including:

  • In late 2017, the most comprehensive tax reform in over 30 years, the Tax Cuts and Jobs Act, was signed into law.  Due in large part to the Roundtable’s advocacy efforts, TCJA preserved interest deductibility; retained like-kind exchanges for real estate; and maintained depreciation and cost recovery rules. The Roundtable and its Tax Policy Advisory Committee is continuing its efforts with Treasury and the Administration to ensure appropriate implementation of the comprehensive law.
  • Congress passed financial deregulation legislation – Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155) – that included important reforms to the Basel III High Volatility Commercial Real Estate (HVCRE), which promote sustainable development and lending, and lowers financial barriers for job-creating projects.
  • The Federal Reserve and four other federal agencies approved a proposal to simplify and ease the Volcker Rule.  The proposal, known as Volcker 2.0, seeks to simplify regulatory requirements by giving banks new quantitative “bright-line rules” to provide more clarity on what activities are prohibited and permitted.
  • As a long-time supporter of the ENERGY STAR Program, The Roundtable was a key player in the creation and ongoing development of the EPA’s new charter tenant program “ENERGY STAR for Tenants” labeling platform of high-performance leased office spaces.
  • Anticipating infrastructure as a policy issue for possible compromise after the upcoming midterm elections, The Roundtable offered comments to the Administration and Congressional committees on real estate’s role in creating public-private partnerships to help repair the roads, transit, broadband, power grid and other systems needed to make our communities safe, productive and competitive.

Newly elected Roundtable Chair Debra A. Cafaro (Chairman and Chief Executive Officer, Ventas, Inc.) emphasized that The Roundtable’s policy agenda remains full of key issues that require our engagement as a non-partisan industry voice. “Above all, we must uphold our independent and respected position on Capitol Hill, emphasizing our optimism about the economy and the positive contributions the real estate industry provides as a job creator and as a cornerstone for retirement savings. We are committed to proactively advancing policies that promote a healthy balance of capital and people flows to create sustainable economic growth that is good for our members, our industry and our national economy,” said Cafaro.

The publication includes a listing of all Roundtable members, as well as the FY2019 Board of Directors and Committee Leadership, and has been mailed to all Roundtable members, congressional offices on Capitol Hill, and is available online.

Strong Commercial Real Estate Conditions Persist Despite Concerns Over Interest Rates and Trade Tariffs

Posted on by Trey Jackson

Near-term optimism about commercial real estate market conditions are tempered by concerns over expected increases in interest rates and uncertainty about the effects of international trade tariffs, according to several recent economic and industry reports.  

The Federal Reserve is expected next week to raise its target interest rate above the rate of inflation for the first time in a decade.

  • The Federal Reserve is expected next week to raise its target interest rate above the rate of inflation for the first time in a decade. The Federal Open Market Committee in March raised the fed funds rate a quarter point to 1.75 percent, signaled rates will climb to 2 percent in 2018, and projected three additional hikes for 2019. (Reuters, June 7, “Fed Clambers Back to Positive Real Rates, Now Debate is When to Stop” and Politico, March 21) 
  • Interest rates and economic uncertainty are top concerns for the commercial real estate industry, despite near-term optimism from improved economic conditions, changes in the tax code and the promise of a loosening regulatory environment. ( 2018 Akerman U.S. Real Estate Sector Report, June 5) 
  • Nareit reports that the U.S. real estate market is likely to continue to grow for the next three to five years as current policies such as tax reform benefit the industry, according to a panel at a Capital Markets Update during REITweek: 2018 Investor Conference. (Nareit, June 6) 
  • The Fed’s latest “Beige Book” of current economic conditions shows positive growth and widespread concerns about trade tariffs.  The report also notes that steel and aluminum prices rose, “sometimes dramatically” due to recent duties imposed by the Trump Administration. The Beige Book is one of the first official reports showing the economic impact of the new tariffs on domestic business. (Roundtable Weekly, March 9 and  The Wall Street Journal, April 18)  
  • Commenting on these concerns, Roundtable President and CEO Jeffrey DeBoer noted the findings of The Real Estate Roundtable’s Q2 2018 Economic Sentiment Index: “There are fears about political uncertainty, trade wars, and interest rate increases, which are having some impact and creating a manageable amount of uncertainty for the markets for the remainder of 2018 and looking ahead to 2019.”  (Roundtable News Release, May 10) 

Economic policies that support economic growth will be a focus of discussion during next week’s 2018 Roundtable Annual Meeting in Washington, DC, which will feature special guests such as House Majority Leader Kevin McCarthy (R-CA), House Ways and Means Chairman Kevin Brady (R-TX) and Senate Minority Leader Chuck Schumer (D-NY).

Trump Administration Imposes Tariffs on Imported Steel and Aluminum from European Union, Canada and Mexico

Posted on by Trey Jackson

The Trump Administration today imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports from the European Union, Canada and Mexico, sparking rebukes from congressional Republicans and foreign policymakers, who have threatened retaliatory measures.

The Trump Administration imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports from the European Union, Canada and Mexico, sparking rebukes from congressional Republicans and foreign policymakers, who have threatened retaliatory measures.

  • When the steel and aluminum tariffs were initially proposed in March, an exemption was granted until June 1 for certain trade partners, including Canada, Mexico and the EU – yet negotiations about the Administration’s domestic production concerns were not resolved by today’s deadline. 
  • Roundtable President and CEO Jeffrey DeBoer noted the commercial real estate industry’s concerns, stating “For every job in the steel production industry, there are more than 50 jobs in the US construction industry (140,000 vs. 7-10 million). New tariffs on construction materials like steel could have the unfortunate, unintended side effect of raising construction costs and reducing jobs in real estate development.” (Roundtable Weekly, March 9) 
  • According to the U.S. Department of Commerce, the U.S. imported 34.6 million metric tons of steel last year, a 15% increase from 2016.  The International Trade Administration reports the largest supplier of steel to the U.S. is Canada, accounting for 77% – while Mexican steel accounts for about 9% of U.S. imports. USA Today reports that the majority of that metal is used in construction, auto manufacturing and appliances. (USA Today, May 31) 
  • House Ways and Means Chairman Kevin Brady (R-TX) today stated, “These tariffs are hitting the wrong target. When it comes to unfairly traded steel and aluminum, Mexico, Canada, and Europe are not the problem-China is. This action puts American workers and families at risk, whose jobs depend on fairly traded products from these important trading partners,” Brady said. 
  • Sen. Mike Lee (R-UT) said he would introduce legislation next week to curtail the president’s powers to impose tariffs for reasons of national security. (The Hill, June 1) 
  • “You don’t treat allies the same way you treat opponents,” Sen. Ben Sasse (R-NE) stated.  “Blanket protectionism is a big part of why we had a Great Depression. ‘Make America Great Again’ shouldn’t mean ‘Make America 1929 Again.'”  

In the Federal Reserve’s latest “Beige Book” about economic conditions, positive growth is tempered by widespread concerns about trade tariffs. The report summary also notes that steel and aluminum prices rose, “sometimes dramatically” due to recent duties imposed by the Trump Administration. (Roundtable Weekly, March 9)  The Beige Book is one of the first official reports showing the economic impact of the new tariffs on domestic business. (Wall Street Journal, April 18)

Top Democrat on House Ways & Means Committee Requests Treasury Guidance on New Pass-Through Deduction

Posted on by Trey Jackson

Clarifying guidance on the new pass-through deduction enacted in last year’s tax overhaul bill is needed “as soon as possible,” according to a letter sent this week by House Ways and Means Committee Ranking Member Richard Neal (D-MA) to Treasury Secretary Steven Mnuchin and Acting Internal Revenue Service Commissioner David Kautter.  (Neal Letter, May 1)

  Clarifying guidance on the new pass-through deduction enacted in last year’s tax overhaul bill is needed “as soon as possible,” according to a letter sent this week by House Ways and Means Committee Ranking Member Richard Neal (D-MA) to Treasury Secretary Steven Mnuchin and Acting Internal Revenue Service Commissioner David Kautter.  (Neal Letter, May 1)

The new tax relief for pass-through businesses is a core element of the Tax Cuts and Jobs Act signed by President Trump in December – and is vital to ensure that the legislation treats all types of businesses, including real estate, fairly and equitably.  (Roundtable Weekly, Dec. 22, 2017) 

The Tax Cuts and Jobs Act reduced the top tax rate on corporations by 40 percent. The new 20 percent pass-through deduction (section 199A) can lower the top tax rate on qualifying pass-through business income to 29.6 percent. Such income was previously taxed at a top rate of 39.6 percent.  

In January, The Roundtable wrote to Treasury Secretary Mnuchin  offering several suggestions designed to maximize the economic impact of the pass-through deduction and avoid unnecessary disruptions to business activity.  [Roundtable Letter, Jan. 18]. 

Specifically, the letter urged Treasury to issue guidance: 

  • clarifying that until final regulations are issued, all qualified trade or business activities may be aggregated at the partner level for purposes of the provision’s wage and asset tests;
  • allowing businesses to qualify for the pass-through deduction with respect to permissible services, even if the business also engages in service activities that are excluded from the deduction (assuming the permissible services are provided on an arm’s length basis); 
  • clarifying that the transfer of real estate in a like-kind exchange does not adversely affect a taxpayer’s pass-through deduction;
  • confirming that the benefit of the deduction extends to shareholders invested in REITs through a mutual fund;
  • construing the “principal asset” test in a manner that does not treat the skill or reputation of a firm’s employees as an “asset” of the business, unless they are reflected in an amortizable tax asset (such as workforce in place); and 
  • confirming that, in the context of the pass-through deduction, the reasonable compensation rules apply exclusively to S corporations.

    The new tax law, enacted last December, was the subject of a Senate Finance Committee hearing last week, where Senate Democrats focused on the pass-through deduction.  (  SFC hearing  , Early Impressions of the New Tax Law – April 24)

In Neal’s letter sent this week, the top democrat on the tax-writing House Ways and Means Committee cites taxpayer (and tax advisors) confusion over the deduction, stating, “Without computational and definitional guidance to assist taxpayers in determining whether, and to what extent, they may quality for the pass-through deduction, it is  difficult for them to properly calculate their quarterly estimated tax payments.”  (Neal Letter, May 1)

Neal adds, “As a result, taxpayers are left struggling to understand its implications, and opportunities to exploit its ambiguities abound. I urge Treasury and IRS to issue guidance as soon as possible to address these concerns.”

He also urges the Trump Administration to issue guidance to prevent abuses of the pass-through deduction. “As taxpayers and practitioners navigate the outer limits of the pass-through deduction, we’re concerned about signs of aggressive tax-minimization strategies,” Neal states in the letter.

The new tax law, enacted last December, was the subject of a Senate Finance Committee hearing last week, where Senate Democrats focused on the pass-through deduction.  (  SFC hearing  , Early Impressions of the New Tax Law– April 24)