How Will the New Tax Act Affect the Commercial Real Estate Industry?

Ta x C u t s a n d J o b s A c t
Presented by:
Brian Newman, CPA
CohnReznick LLP
William Crane, CPA, MST
CohnReznick LLP
Stephen Alimonti, CPA
CohnReznick LLP

D i s c l a i m e r
Any advice contained in this communication, including attachments
and enclosures, is not intended as a thorough, in-depth analysis of
specific issues. Nor is it sufficient to avoid tax-related penalties. This has
been prepared for information purposes and general guidance only
and does not constitute professional advice. You should not act upon
the information contained in this publication without obtaining specific
professional advice. No representation or warranty (express or implied) is
made as to the accuracy or completeness of the information contained
in this publication, and CohnReznick LLP, its members, employees and
agents accept no liability, and disclaim all responsibility, for the
consequences of you or anyone else acting, or refraining to act, in
reliance on the information contained in this publication or for any
decision based on it.
1

To d a y ’ s S p e a k e r s
Brian Newman, CPA
Partner
CohnReznick LLP
2
Partner
CohnReznick LLP
Senior Manager
CohnReznick LLP

Ta x C u t s a n d J o b s A c t –
R e a l E s t a t e R e l a t e d P r o v i s i o n s
• New Individual and Corporate Tax Rates
• Qualified Business Income - “Pass through income deduction”
• Bonus Depreciation and Section 179
• Interest Expense Limitation
• Excess Business Losses
• Carried Interest
• Like-kind Exchange
• Technical Terminations
• Small Business Accounting Method Reforms
• Lifetime Gift Exemption
3

I n d i v i d u a l O r d i n a r y I n c o m e R a t e s
Married Filing Jointly
10% for $0 - $19,050
12% for $19,051 - $77,400
22% for $77,401 - $165,000
24% for $165,001 - $315,000
32% for $315,001 - $400,000
35% for $400,001 - $600,000
37% for $600,001 +
Single
10% for $0 - $9,525
12% for $9,526 - $38,700
22% for $38,701 - $82,500
24% for $82,501 - $157,500
32% for $157,501 - $200,000
35% for $200,001 - $500,000
37% for $500,001 +
[Effective 2018-2025]
4

I n d i v i d u a l C a p i t a l G a i n R a t e s
Married Filing Jointly
0% for $0 - $77,199
15% for $77,200 - $478,999
20% for $479,000 +
Single
0% for $0 - $38,599
15% for $38,600 - $425,799
20% for $425,800 +
5

A l t e r n a t i v e M i n i m u m Ta x ( “ A M T ” )
Increased exemption amounts:
MFJ $109,400 (from $78,750)
Single $70,300 (from $50,600)
Increased phase-outs:
MFJ $1,000,000 (from $150,000)
Single $500,000 (from $112,500)
6

E X A M P L E – I n d i v i d u a l R a t e C h a n g e s
Wages of 360K Wages of 160K Wages of 80K
2018 2017 2018 2017 2018 2017
Wages $360,000 $360,000 $160,000 $160,000 $80,000 $80,000
QBI - - - - - -
Dependents 5 5 5 5 5 5
State Taxes $10,000 $37,125 $10,000 $22,355 - -
Mortgage
Interest
$20,000 $28,000 $20,000 $28,000 - -
Std Ded - - - - $24,000 $12,700
Federal Tax $65,500 $81,350 $16,000 $14,450 $1,850 $4,150
7

C h a n g e s t o S t a n d a r d D e d u c t i o n
Pre-2018 Reform
• $6,500 – single
• $13,000 - MFJ
Post-2018 Reform
• $12,000 – single
• $24,000 – MFJ
• Personal exemptions (Pre-2018 reform was $4,150/person) repealed for
2018
• Child Tax Credit - $2,000 credit with up to $1,400 being refundable.
Phase-out thresholds of $400,000 for MFJ and $200,000 for all other.
There is also a nonrefundable $500 credit for non-child dependents.
8

R e d u c t i o n o f S t a t e a n d L o c a l Ta x
D e d u c t i o n
Pre-2018 Reform
• Full deduction (subject to various limitations) for all state and local
income taxes and property taxes paid
Post-2018 Reform
• Deduction limited to $10,000 for total of income and property taxes paid
9

C o r p o r a t e Ta x R a t e
Reduced to 21% from a top rate of 35%
Corporate AMT is eliminated
[Effective for tax years beginning after December 31, 2017]
10

Q u a l i f i e d B u s i n e s s I n c o m e
D e d u c t i o n
Deduction of 20% of domestic qualified business income
from partnerships, S corporations, or sole proprietorships.
The deduction is factored into taxable income after
adjusted gross income.
11

D e d u c t i o n
Qualified business income for a tax year is the net amount
of items of income, gain, deduction, and loss relating to any
domestic qualified trade or business of the taxpayer.
Capital gains and losses, dividends, and investment
interest are excluded. Wages or guaranteed payments paid
by the trade or business to the taxpayer are also excluded.
12

D e d u c t i o n
The deduction starts to be phased out for specified service
businesses (accountants, health care professionals,
lawyers, financial planners, consultants, etc.) for individuals
with taxable income exceeding $157,500 ($315,000 in the
case of a joint return).
13

D e d u c t i o n
Specified service businesses are any trade or business
involving the performance of services in the fields of health,
law, accounting, actuarial science, performing arts,
consulting, athletics, financial services, brokerage services,
any trade or business where the principal asset of such
trade or business is the reputation or skill of 1 or more of its
employees or owners, or which involves the performance of
services that consist of investing and investment
management, trading, or dealing in securities, partnership
interests, or commodities.
14

D e d u c t i o n
The following additional limitation is phased in for
individuals with taxable income exceeding $157,500
($315,000 in the case of a joint return). The deduction
would be limited to the greater of
a) 50% of the taxpayer's share of wages relating to the
qualified trade or business or
b) the sum of 25% of the W-2 wages relating to the
qualified trade or business and 2.5% percent of the
unadjusted basis immediately after acquisition of all
qualified property.
15

D e d u c t i o n
For this purpose, qualified property means, with respect to
any qualified trade or business for a taxable year, tangible
property of a character subject to the allowance for
depreciation
a) which is held by, and available for use in, the qualified
trade or business at the close of the taxable year,
b) which is used at any point during the taxable year in the
production of qualified business income, and
c) the depreciable period for which has not ended before
the close of the taxable year.
16

D e d u c t i o n
For this purpose, depreciable period means, with respect to
qualified property of a taxpayer, the period beginning on the
date the property was first placed in service by the taxpayer
and ending on the latter of
a) the date that is 10 years after such date, or
b) the last day of the last full year in the applicable recovery
period that would apply to the property under section 168
(determined without regard to ADS lives).
17

D e d u c t i o n
If the net amount of qualified income, gain, deduction, and
loss relating to qualified trade or businesses of the taxpayer
for any tax year is less than zero, the amount is carried
over as a loss from a qualified trade or business in the
succeeding tax year.
18

E X A M P L E – Q u a l i f i e d B u s i n e s s I n c o m e
Contractor Project Manager Attorney
2018 2017 2018 2017 2018 2017
Wages $160,000 $160,000 $360,000 $360,000 $160,000 $160,000
QBI $200,000 $200,000 - - $200,000 $200,000
State Taxes $10,000 $35,950 $10,000 $37,150 $10,000 $35,950
Mortgage
Interest
$20,000 $28,000 $20,000 $28,000 $20,000 $28,000
Federal Tax $73,300 $98,650 $65,500 $81,300 $73,700 $98,600
Self-Emp Tax ($21,300) ($21,150) - - ($21,300) ($21,150)
Federal Tax $52,000 $77,500 $65,500 $81,300 $52,400 $77,450
19

2018 2017 2018 2017 2018 2017
Wages $160,000 $160,000 $460,000 $460,000 $160,000 $160,000
QBI $300,000 $300,000 - - $300,000 $300,000
State Taxes $10,000 $43,450 $10,000 $44,250 $10,000 $43,450
Mortgage
Interest
$20,000 $28,000 $20,000 $28,000 $20,000 $28,000
Federal Tax $101,550 $136,650 $102,300 $117,250 $121,300 $136,650
Self-Emp Tax ($23,975) ($23,825) - - ($23,975) ($23,825)
Federal Tax $77,575 $112,825 $102,300 $117,250 $97,325 $112,825
20

2018 2017 2018 2017 2018 2017
Wages $360,000 $360,000 $1,060,00
0
$1,060,00
0
$360,000 $360,000
QBI $700,000 $700,000 - - $700,000 $700,000
State Taxes $10,000 $110,125 $10,000 $111,325 $10,000 $110,125
Mortgage Int $20,000 $28,000 $20,000 $28,000 $20,000 $28,000
Contributions $20,000 $20,000 $20,000 $20,000 $20,000 $20,000
Federal Tax $296,350 $345,550 $320,375 $318,075 $348,150 $345,550
Self-Emp Tax ($34,675) ($34,525) - - ($34,675) ($34,525)
Federal Tax $261,675 $311,025 $320,375 $318,075 $313,475 $311,025
21

2018 2017 2018 2017 2018 2017
Wages $560,000 $560,000 $5,060,000 $5,060,000 $560,000 $560,000
QBI $4,500,000 $4,500,000 - - $4,500,000 $4,500,000
State Taxes $10,000 $578,275 $10,000 $584,263 $10,000 $578,253
Mortgage
Interest
$20,000 $28,000 $20,000 $28,000 $20,000 $28,000
Contributions $40,000 $40,000 $40,000 $40,000 $40,000 $40,000
Federal Tax $1,604,075 $1,898,150 $1,828,975 $1,790,375 $1,937,068 $1,898,150
Self-Emp Tax ($136,450) ($136,300) - - ($136,450) ($136,300)
Federal Tax $1,467,625 $1,761,850 $1,828,975 $1,790,375 $1,800,618 $1,761,850
22

Not available to C Corporations
Not available based on taxpayer’s wages
Not available to certain professional service providers
like accountants, attorneys, certain consultants, insurance brokers
Available to businesses operating as
sole proprietorship or flow through entity
Limitations apply based on
wages of the eligible trade or business
unadjusted cost of depreciable property
taxpayer’s taxable income
23
Q u a l i f i e d B u s i n e s s I n c o m e ( Q B I )
D e d u c t i o n : W h o D o e s i t B e n e f i t ?

• What is properly classified as Wages?
• How are wages paid by a PEO treated?
• How are wages paid by a CPM treated?
• Is a related management company a Specified Service Business?
• What is considered a trade or business?
• Can related entities be aggregated?
• Can multiple activities be grouped as one?
24
D e d u c t i o n f o r Q u a l i f i e d B u s i n e s s
I n c o m e ( Q B I ) P r a c t i c a l M a t t e r s

C o s t R e c o v e r y : N e w 1 0 0 % B o n u s
D e p r e c i a t i o n
100% bonus depreciation for assets that are:
• Acquired after 9/27/2017, AND
• Placed in service after 9/27/217
If you don’t meet the requirements, you get stuck back into PATH
act bonus:
• Assets acquired or placed in service before 9/28/17, but placed in
service during 2017: 50% bonus depreciation.
• Assets acquired or placed in service before 9/28/17, but placed in
service during 2018: 40% bonus depreciation.
25

C o s t R e c o v e r y : B o n u s D e p r e c i a t i o n
W h a t i s t h e “ A c q u i s i t i o n D a t e ? ”
An asset is “acquired” on the date the taxpayer enters into a written
binding contract (old rule from 2003).
• If it is “acquired” property – you look to the date on which you entered
into the binding written contract. Treas. Reg. 1.168(k)-1(b)(4)(ii).
• If it is self-produced (manufactured, constructed) property, then the
“acquisition” date is the date on which construction first begins. Two
potential interpretations:
– A building has a single “acquisition date.” (Treas. Regulations)
– Components can have separate “acquisition dates.” This could result
in multiple “acquisition dates” for a single building and different
component rates for portions of a single building. (Rules similar to
2011 revenue procedure).
26

“ A c q u i s i t i o n D a t e ”
Acquisition date: Self-constructed assets – other special
rules/definitions:
• Construction begins when work of a significant physical nature
begins. Treas. Reg. 1.168(k)-1(b)(4)(iii)(B).
• Safe harbor – taxpayer must incur more than 10% of the costs before
work of a significant physical nature begins.
• Generally, if components are purchased (which become part of the
larger self constructed asset) and they do NOT meet the acquisition
date, the cost of the components would be subject to the lower bonus
percentage.
27

Example: Self-Produced Property
Result: 100% bonus on qualified property!
28

29

30

31

Result:
100% bonus on Component #2!
30% bonus on Component #1!
32

Q u a l i f i e d P r o p e r t y
The effective date rules for bonus and for other depreciation
rules are different.
• Bonus is based on acquisition/placed in service as of 9/28/2017
• Definitions and recovery periods were effective for years beginning on or
after 1/1/18.
• Creates confusion!
33
On or after
9/28/2017
2018
Short lived property Yes Yes
QIP (Including QLIP, etc.) Maybe No (need technical correction)
Qualified film, movie Yes Yes
Computer software Yes Yes

Used property is bonus eligible.
• Cannot be property formerly used by the taxpayer
• Cannot be property owned by a related party
• Cannot be property transferred in a 351/721 or other
“step-in the shoes” (carry-over basis) transactions
What is not eligible for bonus:
• Public utility property
• “Floor plan financing” property
34

• Simplifying convention for 2017: taxpayers can choose to use
50% bonus for the entire year instead of splitting the year.
• 100% can make bonus depreciation even more valuable.
• With rates going down, a 2017 “look-back” study becomes
very valuable.
35

D e p r e c i a t i o n P r o v i s i o n s - Q u a l i f i e d
I m p r o v e m e n t P r o p e r t y
The separate definitions of qualified leasehold, qualified
restaurant, and qualified retail improvement property are
eliminated.
Qualified Improvement Property is depreciated straight line
over 15 years (if Congress implements fix!).
For ADS purposes, the new lives are as follows: 20 years
for QIP, 30 years for residential real property, and 40 years
for non-residential real property.
36

C o s t R e c o v e r y : R e c o v e r y P e r i o d s
The QIP mix-up (2018):
• Qualified Leasehold Improvement Property, Qualified Restaurant
Property, and Qualified Retail Improvement Property definitions are
removed and replaced with Qualified Improvement Property. Effective
for years beginning 1/1/18.
• Congress meant for QIP to be 15 year property, but statute needs to be
corrected.
– Technical corrections may not happen until next year and are
not guaranteed.
• ADS change:
QIP is 20 year ADS property
Residential Rental is 30 year ADS property
• Mandatory ADS change for “Qualified Real Property Trades or
Businesses”
37

E x p a n s i o n o f § 1 7 9 E x p e n s i n g
Changes to the definition of qualified property:
Old rules for tax years beginning prior to 1/1/2018:
• Businesses could deduct up to $500,000 of qualifying property, and is
reduced to the extent the amount of qualifying property exceeds
$2,000,000
• Qualified property did NOT include:
– Assets used in certain lodging facilities, such as hotels and
apartment complexes
– Qualified Improvement Property
– Certain non-residential envelope and building assets, including
roofing, HVAC property, fire protection systems, and security/alarm
systems
38

New rules for tax years beginning on or after 1/1/2018:
• Businesses can deduct up to $1,000,000 of qualifying property, and
is reduced to the extent the amount of qualifying property exceeds
$2,500,000
• Qualified property now includes:
– Depreciable tangible personal property used in lodging facilities,
such as hotels and apartment complexes
– Qualified Improvement Property
– Certain non-residential envelope and building assets, including
roofing, HVAC property, fire protection systems, and security/alarm
systems
39

Qualified Property Still Excludes:
Most real property, including:
• Building enlargements/expansions
• Elevators
• Escalators
• Internal structural framework (e.g. floor slabs, load-bearing columns,
structural steel)
40

I n t e r e s t E x p e n s e L i m i t a t i o n
Business interest expense is limited to business interest
income plus 30% of adjusted taxable income. Any excess
interest is disallowed and carried forward to the succeeding
tax year.
Adjusted taxable income is taxable income computed
without regard to non-business income and expenses,
business interest expense, business interest income,
NOLs, the qualified business income deduction, and
depreciation and amortization (only in the case of taxable
years beginning before 1/1/2022).
.
41

• For partnerships, the business interest limitation is
determined at the partnership level.
• Interest disallowed is passed out to partners as excess
business interest (a separately stated item).
• Excess business interest is carried forward indefinitely on
the partner's return and can be used when the
partnership that created the excess business interest
distributes excess taxable income (a separately stated
item) to the partner.
42

• For S corporations, the business interest limitation is
determined at the S corporation level.
• Interest disallowed is carried forward to the succeeding
tax year at the S corporation level.
• To the extent that the S corporation has excess taxable
income, it is passed out as a separately stated item.
43

• Real property trades or businesses can irrevocably elect
out of the interest limitation ("electing real property trade
or business"), but they are then required to use ADS to
depreciate residential real property, non-residential real
property, and qualified improvement property. Bonus
depreciation is not allowed on property that is required to
use ADS.
• The business interest limitation doesn't apply to a
taxpayer if the taxpayer's average annual gross receipts
for the three tax year period ending with the prior tax year
doesn't exceed $25 million.
44

E x c e s s N e t B u s i n e s s L o s s e s
Excess net business losses over a threshold ($250,000
single and $500,000 MFJ) are disallowed and treated as an
NOL.
NOL- no carryback, unlimited carryforward, but can only
use against 80% of taxable income each year
Effectively this means that trade or business losses can
only offset up to $250,000/$500,000 of non-business
income.
45

C a r r i e d I n t e r e s t P r o v i s i o n
For partnership interests received in connection with
services consisting of raising or returning capital and either
investing in (or disposing of) specified assets (or identifying
specified assets for such investing or disposition) or
developing specified assets:
There is a three-year holding period requirement for the
partnership interest or an interest in the underlying
investments to be eligible for long-term capital gains tax
rates.
46

L i k e - K i n d E x c h a n g e s
Section 1031 Like-Kind Exchanges:
Deferral of gain limited to real property exchanges
47

Te c h n i c a l Te r m i n a t i o n s
Prior Law:
Sale or exchange of 50% or more of profits and capital
interest in a partnership during any 12 month period
resulted in a technical termination of the partnership
• required a filing of a short period income tax return
• required a re-start of depreciation
New law eliminated technical terminations
48

S m a l l B u s i n e s s Ta x R e f o r m
Small Business Accounting Method Reforms
• “Small business” = less than $25mil in average annual gross receipts
• Cash method of accounting. Expansion of use of cash method of
accounting
• Accounting for inventories: Reduced need to account for inventories
for tax
• Capitalization and inclusion of certain expenses in inventory costs:
Limits on UNICAP requirement
• Accounting for long-term contracts: Limits on requirement to use
“percentage of completion method.”
• No limits on deductibility of interest expense
• When applying the $25mil gross receipts test attribution will apply
49

E x e c u t i v e C o m p e n s a t i o n a n d
E m p l o y e e B e n e f i t s
Fringe Benefits – Employees Taxable For Moving Expense
Reimbursements
• For 2018-2025, employees taxable for employer moving expense
reimbursements
Fringe Benefits – Employer Deductions
Elimination of employer deductions for:
• Expenses for entertainment (ball games and shows), amusement or
recreation (on-site gyms), even if directly business-related.
• Membership dues with respect to any club organized for business,
pleasure, recreation or other special purposes.
• Providing qualified transportation fringes (parking, transit passes, van
pools, bicycle commuting expenses) and, except as necessary for
ensuring the safety of an employee, the employee’s commuting
expenses.
50

Fringe Benefits – Employer Deductions For Employee Meals
• Employee travel meals - remains at 50% but beware entertainment
taint.
• Employee de minimis meals (overtime meals, occasional meals) - 50%
for 2018-2025, then 0% for 2026 and after.
• Employee meals on employer’s premises for employer’s convenience -
50% for 2018-2025, then 0% for 2026 and after.
• Employee meals at employer eating facility (on-site employee
cafeteria) that meets the de minimis fringe requirements (i.e., revenues
equal or exceed direct costs) and for employer’s convenience (entire
eating facility qualifies as for employer’s convenience if more than half
of employees receive meals in facility for employer’s convenience) -
50% for 2018-2025, then 0% for 2026 and after.
51

Employer Credits
• For 2018 and 2019, 12.5% - 25% general business credit for employers
on the compensation paid to certain employees (employed for at least 1
year and earn less than 60% of the compensation threshold for tax-
qualified retirement plan “highly compensated employee” status -
$72,000 for 2018) per year under the Family and Medical Leave Act of
1993.
Employer Income Tax Withholding
• Use existing withholding tables and W-4s until IRS provides new
withholding tables, then will need new W-4s. Supplemental wages (e.g.,
bonuses) will be taxed at 22% (reduced from 25%) for the first $1m, and
then at 37% (reduced from 39.6%) above $1m.
52

Executive Compensation
• Performance-based compensation and commissions compensation
exceptions to the public company $1m deduction limit for certain
covered employees eliminated
• Private companies given the opportunity under certain broad-based
plans to permit “inclusion deferral elections” by certain employees to
defer the compensation income attributable to stock option exercises
and the settlement of stock-settled restricted stock units (RSUs)
• 21% excise tax on tax-exempt entities for the payment of compensation
in excess of $1m and/or large separation payments to certain
employees
• Excise tax increased from 15% to 20% for certain stock compensation of
certain employees of expatriated corporations
53

Retirement Plans and IRAs
• Extension of rollover period for amounts deemed distributed on account
of a tax-qualified retirement plan loan default
• Special 2016 disaster relief for certain participants in tax-qualified
retirement plans
• ROTH IRA recharacterizations limitation - once accomplished, can no
longer undo the recharacterization of a traditional IRA into a ROTH IRA
(once recharacterized, must remain as a ROTH IRA after December 31)
54

D e d u c t i o n s
R&E Expenses
• Beginning in 2022, research and experimental expense would need to
be capitalized and amortized over 5 years in the U.S.
• 15 year amortization period for costs borne outside of the U.S.
Limitation on Certain Entertainment Expenses
• Makes most (non-meal) entertainment expenses non-deductible.
• Most meal expenses still 50% deductible
Repeal of the 199 (Domestic Production Activities) Deduction
55

I n t e r n a t i o n a l Ta x P r o v i s i o n s

D e e m e d R e p a t r i a t i o n Ta x
ALL US persons – corporations including S corporations, partnerships, trusts,
individuals – owning 10% or more of a controlled foreign corporation (CFC)
must pay a mandatory tax on the earnings and profits (E&P) held by the CFC
Rates: 15.5% tax on E&P attributable to cash and 8% tax on E&P attributable
to illiquid assets – rates are achieved through a dividends received deduction
Possible to net negative E&P from one CFC against positive E&P of another
CFC
Option to pay any tax due over an 8 year period.
Limited foreign tax credits triggered by the deemed repatriation would be
available to offset the tax.
57

D e e m e d R e p a t r i a t i o n Ta x ( c o n t . )
S corporations would be subject to the deemed repatriation rules upon the
occurrence of certain triggering events. There is no similar exception for
partnerships
NOTE: the deemed repatriation rule is part of Subpart F and applies BEFORE
the rules applicable to actual distributions; this means a US shareholder of a
CFC with positive E&P will pay tax under the subpart F and deemed
repatriation rules for 2017, not on actual distributions
58

Te r r i t o r i a l Ta x S y s t e m
Instead of subjecting US corporations to tax on worldwide income, a “participation
exemption” type system would apply to dividends paid by foreign corporations to
US corporate shareholders who own at least 10% of the foreign corporate stock.
US corporate shareholders would be allowed to take a deduction (similar to a
dividends received deduction) for these dividends, so that no US tax would be
imposed.
There would be no indirect foreign tax credit available because dividends are
exempt from US tax under the participation exemption system.
Deduction would not apply to dividends from passive foreign investment
companies (“PFICs”).
Existing subpart F rules and section 956 rules still apply; subpart F and section
956 income inclusions can be offset with foreign tax credits.
59

C h a n g e s t o S u b p a r t F
New category of subpart F income will require US shareholders to include the
“global intangible low taxed income” (“GILTI”) of CFCs in current US taxable
income.
• The mechanics of the GILTI provision are complex, but their effect is to
establish a minimum tax regime that applies to US shareholders of certain
CFCs with income over a routine return on tangible depreciable business
assets.
• In computing GILTI, US shareholders must determine the US tax basis of
assets held by CFCs.
For 2018 and future years, the definition of “US Shareholder” has changed –
any US person owning more than 10% of the voting power OR value of a CFC
is subject to the subpart F rules. Attribution rules have also been expanded.
The anti-deferral rules that apply to CFCs for oil related income and certain
types of shipping investments are repealed.
60

B a s e E r o s i o n A n t i - A b u s e Ta x
( “ B E AT ” )
Meant to prevent erosion of the US tax base via US corporations making
deductible payments to foreign affiliates; these deductions may be restricted
under the BEAT provisions – will apply to interest, management fees, royalties,
etc.
BEAT applies to domestic corporations with at least $500 million in annual
domestic gross receipts and with a sufficient “base erosion percentage”
(relationship of deductible payments to allowable deductions)
Requires calculation of “minimum tax amount” – compares 10% of income (not
including deductible payments to foreign affiliates) with regular tax liability
including such deductions and reducing certain credits – where the 10%
amount is greater, BEAT will be due.
BEAT will not apply to payments treated as cost of goods sold (COGS), or
payments that require no markup under the section 482 transfer pricing rules.
Reporting of BEAT will be done on Form 5472 – failure to file Form 5472 will
trigger a $25,000 penalty per form (increased from $10,000). RICs, REITs, and
S corporations are not subject to BEAT.
61

F o r e i g n Ta x C r e d i t s
Under new territorial tax system, dividends from CFCs to US corporations
will not be subject to US corporate tax; therefore the indirect foreign tax
credit under section 902 is no longer necessary.
The foreign tax credit under section 960 that applies to subpart F
inclusions will still be allowed.
Source rules for inventory: under pre-Act law, source of income from sale
of inventory property produced in the US and sold outside the US can be
treated as foreign source income; for years that begin after 12/3/2017, the
source of income from inventory property produced in part in the US and in
part outside the US must be allocated based on the location of production
– title passage is no longer relevant.
A new foreign tax credit “basket” is created for Income of foreign branches
– income of a US taxpayer that is attributable to a qualified business unit
(“QBU”) must be allocated to its own foreign tax credit basket.
62

G r e c i a n M i n i n g ; R e v. R u l . 9 1 - 3 2
The Tax Court in Grecian Magnesite Mining (149 TC No. 3) held that a foreign
corporation’s gain on the sale of an interest in a partnership that is engaged in
a US trade or business is not US source income and is not effectively
connected with a US trade or business (“ECI”).
Grecian Mining overrules the IRS position in Rev. Rul. 91-32 that a foreign
person’s sale of an interest in a partnership that is engaged in a US trade or
business results in ECI.
The Act provides that gain realized by nonresident individuals and foreign
corporations that are partners in US partnership upon the sale of their
partnership interests may be treated as ECI to the extent the gain exceeds
certain thresholds – the new rule would apply to transactions occurring on or
after November 27, 2017.
63

G r e c i a n M i n i n g ; R e v. R u l . 9 1 - 3 2
The Act also would require buyers of these partnership interests to withhold
10% of the amount realized on relevant transactions occurring after December
31, 2017.
The IRS has delayed the effective date of the 10% withholding rules with
respect to sales by foreign partners of their interests in publicly traded
partnerships, due to issues presented by these transactions (e.g., it may be
difficult to determine if the owners of shares of a publicly traded partnership are
US or non-US persons).
64

T h o u g h t s
The deemed repatriation regime will require US taxpayers that are shareholders in CFCs to
calculate the CFCs’ accumulated E&P amounts as soon as possible. It will be important to
know the correct amount of E&P so that the proper amount of tax can be paid with 2017 tax
returns. In addition, US corporations that are 10% shareholders in CFCs should calculate
the amount of foreign taxes available that can be credited against the deemed repatriation
tax. Note that the 15.5% and 8% rates are considerably higher than the rates proposed in
the November House bill, meaning projections for liability under these rules may need to be
revised.
Non-corporate shareholders of CFCs who are subject to the deemed repatriation rules will
not benefit from the territorial tax system.
The computations required for the GILTI and BEAT provisions are extremely complicated.
Preparation of tax returns for taxpayers affected by these rules will be time consuming.
Foreign tax credits are still allowed for subpart F income inclusions, and it is not clear how
these foreign tax credits would be calculated given that section 902 would be repealed.
IRS guidance on these provisions is being released, with Notice 2018-07 (regarding
specifics on the deemed repatriation rules) being released on Friday Dec. 29 2017. Future
guidance may affect the impact of the new rules.
65

T r u s t & E s t a t e Ta x R e f o r m

E s t a t e Ta x R e f o r m
• Lifetime estate & gift exemption doubled to over $11 million per
taxpayer
• Highest estate/gift tax rate is 40%
• Generation skipping transfer tax (GST) exemption also doubled
• Taxable distributions from non-GST trusts
• Late allocation of GST exemption to trusts
67

U s e I t o r L o s e I t
• Sunset after 2025 + political risk = possible limited opportunity
• Clawback Concerns
• TCJA requires treasury secretary to prescribe regulations to avoid
clawback if exemptions later reduced
• If original gift clawed back - planning now will still move appreciation
out of estate
68

N e w O p p o r t u n i t i e s f o r P l a n n i n g
Planning Must Continue
• Swapping assets held by a trust for basis step-up
• Non-tax reasons to plan: asset protection, business succession,
liquidity
• Shifting wealth to those with unneeded exemptions
States Estate and Inheritance Tax in Flux
• Connecticut gift/estate exemption $2.6 mil in 2018, $3.6 mil in 2019,
to match federal in 2020
• Maryland exemption $4 mil 2018 & to match federal 2019
• New York exemption now $5.25 mil & to match federal in 2019
• New Jersey currently repealed, newly elected governor
69

O t h e r M i s c e l l a n e o u s P r o v i s i o n s
For amounts paid or incurred on or after Dec. 22, 2017, deduction for
lobbying expenses with respect to legislation before local government
bodies (including Indian tribal governments) is eliminated.
The deduction for payment of alimony is eliminated and the recipient of
alimony does not need to include the payments in income.
[Effective for divorce and separation agreements executed after
12/31/2018]
Child Tax Credit - $2,000 credit with up to $1,400 being refundable.
Phase-out thresholds of $400,000 for MFJ and $200,000 for all other.
There is also a nonrefundable $500 credit for non-child dependents.
70

O t h e r M i s c e l l a n e o u s P r o v i s i o n s
Charitable contribution limitation of 60% of modified adjusted gross income.
No charitable deduction allowed for a payment to a college or university in
exchange for the right to buy sports tickets.
Entertainment expenses are not deductible.
Medical Expenses - limited to amount that exceeds 7.5% of adjusted gross
income.
Miscellaneous itemized deductions subject to a 2% floor are suspended.
Mortgage interest is limited to the first $750,000 of principal on homes
purchased after December 15, 2017. Deduction for interest on home equity
lines of credit is suspended.
Personal casualty losses are only deductible to the extent that they are
attributable to federally declared disasters or to the extent of personal casualty
gains.
71

E x c l u s i o n s f r o m C o n t r i b u t i o n s t o
C a p i t a l
For contributions made after Dec. 22, 2017 (except as otherwise provided
below), “contributions to capital” does not include:
(1) any contribution in aid of construction or any other contribution as a
customer or potential customer, and
(2) any contribution by any governmental entity or civic group (other than a
contribution made by a shareholder as such). (Code Sec. 118, as amended by
Act Sec. 13312)
Exception—prior approvals. The new provision does not apply to any
contribution made after Dec. 22, 2017 by a governmental entity pursuant to a
master development plan that had been approved prior to such date by a
governmental entity
72

O t h e r C h a n g e s
• Moving Expenses
• Employee Business Expenses
• Domestic Production Activity Deduction
73

O t h e r C h a n g e s
529 Plans
Pre-2018 Reform
• Distributions could be used only for post-secondary education.
Post-2018 Reform
• In addition to post-secondary education, up to $10,000 per year per
student can be used for elementary and secondary public, private or
religious schools.
74

C o n t a c t
Brian J. Newman, CPA
CohnReznick LLP
959-200-7009
Brian.Newman@CohnReznick.com
CohnReznick LLP
617-478-9417
William.Crane@CohnReznick.com
CohnReznick LLP
617-478-9416
Stephen.Alimonti@CohnReznick.com
75

How Will the New Tax Act Affect the Commercial Real Estate Industry?

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