Don Warrant, CPA
Director | Tax Practice
The incoming administration in Washington and the majority in Congress—both from the same political party for the first time in years—indicate that massive tax reform will be a topic of discussion, if not a reality, in 2017. What does this mean for the commercial real estate industry?
Stage is Set for Tax Reform
Members of both parties in Congress have recently highlighted tax reform plans, even working overtime into the legislative break. Many lawmakers have long held that reform is overdue—a badly needed simplification and redesign of the U.S. Tax Code.
U.S. House Ways and Means Committee chief tax counsel, Barbara Angus, has gone on record saying that tax reform legislation is being crafted to be ready in early 2017, a bill expected to be derived from the House GOP “Better Way” tax reform blueprint released last summer.
Senate Majority Leader Mitch McConnell (R-KY) has said that Republican lawmakers anticipate two budget resolutions in 2017: the first concerning repeal of the Patient Protection Affordable Care Act, the second addressing tax reform.
The Current (December 2016) Tax Reform Agenda
At this point, no one can say how tax reform will shake out and what details of various aspects of any reform will affect different taxpaying individuals and entities. In terms of overall effect, the looming reform has been likened to the tax reform of 1986—which was a bit of a nightmare.
Some general points of any likely reform:
- Simplified total number of tax brackets, from the current seven to about three
- Increase in standard individual deduction
- Elimination or capping of most individual tax deductions
- Repeal of estate and gift taxes
Possible reform measures that would impact the commercial real estate industry:
- Full and immediate expensing on the purchase price of a building, instead of taking depreciation deductions on a building’s cost over many years
- Limitation or elimination of the business interest expense deduction
- Section 1031 may not be preserved
- A single tax rate for business pass-through income
Tax Change Intensifies Need for 2016 Cost Segregation Study
Given that reform items under discussion include changes to depreciation and expensing for building purchases, there’s a chance that the tax year 2016 may be the best year for commercial property owners to take advantage of doing a cost segregation study.
The upshot: tax savings accruing from accelerating depreciation may be taken off the table as a tax minimization strategy in future years.
We stress again: All speculation about specifics of the coming tax reform is just that, speculation. It does seem that the commercial real estate industry and other businesses will see some more generous tax rates—but, when they factor in the proposed broadening of the tax base and loss of deductions, certain businesses and their owners may realize limited tax savings or possibly a tax increase.
It also seems that cost recovery might soon become an even more highly complicated process, especially when you factor in how each individual state will seek to either conform or decouple from the federal rules.
(One note: Tax reform discussion also has yet to engage the commercial real estate industry and professionals who serve that industry.)
Though specifics remain unclear right now, looming tax reform only intensifies the importance of performing a cost segregation study for the 2016 tax year, or for prior tax years, and recognize the tax savings now.
Contact us or call Don Warrant, CPA at 716.847.2651 to discuss the tax savings opportunities that are available for commercial real estate owners for the 2016 tax year.