Republicans in Congress have less than a month to meet their 2017 tax reform deadline. If lawmakers can send the Tax Cuts and Jobs Act to President Donald Trump for approval by Christmas, big changes could be in store for the United States tax code.
As of this writing, the House and Senate have each released their own version of the GOP bill. Now, with only a few weeks left in the year, the two chambers are racing to finalize a shared tax reform vision.
In addition to the imminent deadline and the usual Democratic opposition, however, the bill’s supporters seem to face another challenge: resistance from the real estate and construction industries. Numerous trade groups, such as the National Association of Home Builders, have recently come out against the House and Senate proposals.
Before siding with one party or the other, business owners should familiarize themselves with what is contained in the two versions of the bill. We recognize, of course, that few people have the time to read all 429 pages of the House bill (or the Ways and Means Committee’s 82-page summary [PDF]). In the interest of informing the homebuilding and real estate development organizations Offit Kurman serves, we’ve put together this short article, which provides an overview of several key provisions in the two current versions of the Tax Cuts and Jobs Act.
Bigger Standard Deductions, Smaller Mortgage Interest Deductions
Both versions of the bill would raise the standard deduction from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for joint filers. Furthermore, the House plan would also cut the deductible mortgage interest loan limit in half—from $1 million to $500,000.
Both versions would do away with the mortgage interest deduction for second homes. Additionally, the Senate version would prohibit individuals from deducting property taxes, or state and local income or sales taxes (SALT), while the House version would limit itemized SALT deductions to $10,000.
A Lower Income Tax Rate—But One That May Exclude Many “Pass-through” Companies
One point of contention, particularly in regards to the House’s version of the plan, is its treatment of “pass-through” companies. In most U.S. businesses, profits “pass through” to the individual owner or owners, who then pay income tax on their personal returns. Sole proprietorships, S corporations, limited liability companies, and partnerships can all be defined as pass-through entities.
Currently, pass-through companies pay a maximum of 39.6% of their taxable income. The new GOP tax plan seeks to reduce that to 25%. In the House version of the bill, only 30% of an owner’s income would be eligible for the pass-through rate, and many personal service entities—including pass-through companies in engineering, construction, financial services, and consulting—would not be able to take advantage of the 25% rate at all. Meanwhile, the Senate version allows pass-through companies to subtract 17.4% of their business income from their taxable income—but, again, it excludes service-oriented organizations.
Capital Gains Changes
Both versions of the bill would alter the capital gains tax rules. Currently, homeowners can exclude up to $250,000 (or $500,000 for married taxpayers filing jointly) from a sale of their primary residence, as long as they’ve lived at the property for at least two of the past five years. The House and Senate proposals would increase the minimum to five out of the past eight years. Taxpayers would also be able to claim the exclusion only once in a five-year period, and individuals collecting over $250,000 (or $500,000 for married couples) in adjusted gross income may not be able to use the exclusion.
Other Important Changes Impacting the Real Estate and Construction Industries
- Under both versions of the bill, businesses could write off the cost of qualified property they have acquired and placed in service anytime between September 27, 2017 and January 1, 2023.
- Both versions would increase Section 179 depreciation limits from $510,000 to $5 million (House) or $1 million (Senate), and bump up the $2,030,000 total equipment acquisitions cap to $20 million (House) or $2.5 million (Senate).
- The House proposal would repeal the Domestic Production Activities Deduction (DPAD), through which many contractors can currently deduct 9% of their Qualified Production Activities Income (QPAI).
- Finally, there’s a chance that the bill may reduce or eliminate a number of significant energy efficiency incentives as well as tax credits such as the historic tax credit, the New Markets Tax Credit, and the Low-Income Housing Tax Credit.
Check back soon for Part 2 of this article, in which we will offer analysis about these provisions, as well as practical suggestions for business owners.
In the meantime, we welcome your comments, questions, and thoughts. Please reach out to us if you’re unsure about how the tax bill will affect your business. The attorneys at Offit Kurman can help you plan ahead to reduce your liability and overcome your legal challenges.
ABOUT TRACIE CLABAUGH
Tracie Clabaugh assists real estate developers, homebuilders, lenders and homeowners with a wide variety of real estate transactions and land use and zoning matters.
Tracie prepares, reviews and negotiates various types of commercial and residential real estate contracts and leases. She also drafts documents related to homeowner associations, disclosure documents for builders and developers, corporate documents for homeowner associations, deeds, deeds of trust, promissory notes, commercial contracts of sale, forbearance agreements and other real estate related agreements and instruments. She reviews title work and provides title opinions, reviews improvement plans, engineering plans, detailed site plans and surveys for real estate transactions, performs due diligence and manages community reviews for builders and developers. This work includes, but is not limited to, updating homeowner association disclosures, preparing necessary easement agreements and working with municipalities and County governmental entities in order to obtain the required subdivision approvals.
ABOUT OFFIT KURMAN
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