Why Donald Trump will not be the only winner out of US fiscal reform
▶ A new real estate tax break is planned for partnerships and liability businesses, which is great for investors in the United States
Policymakers scrambling to lock up Republican support for the tax reform bill, which is expected to be voted on late today, added a complicated provision late in the process – one that would provide a multimillion-dollar windfall to real estate investors such as the US president Donald Trump.
The change, which would allow real estate businesses to take advantage of a new tax break planned for partnerships, limited liability companies and other so-called “pass-through” businesses, combined elements of House and Senate legislation in a new way.
Its beneficiaries are clear, tax experts say, and they include a president who has said that the tax legislation would not help him financially.
“This last-minute provision will significantly benefit the ultra-wealthy real estate investor, including the president and lawmakers on both sides of the aisle, resulting in a timely tax-reduction gift for the holidays,” said Harvey Bezozi, a certified public accountant and the founder of website Your Financial Wizard. “Ordinary people who invest in rental real estate will also benefit.”
James Repetti, a tax law professor at Boston College Law School, said: “This is a windfall for real estate developers like Trump.”
Asian investors could benefit from “considerable tax savings” should Mr Trump’s signature tax plan be enacted – with those holding US real estate set to gain the most, according to the
South China Morning Post in October. “Among the key changes discussed, the possible repeal of the 40 per cent US federal estate tax is definitely a development that Asian investors should watch closely,” said George McCormick, a lawyer with international firm Withers in Hong Kong, noting the US property market saw significant investment from Asia – with US$31.7 billion coming from Chinese investment in residential real estate alone.
Steven Sieker, the Asia Pacific Head of Baker McKenzie’s Tax Practice, told the paper that a 20 per cent corporate tax rate would be one of the lowest of any the OECD countries, and would reduce much of the tax rate advantage offered by jurisdictions throughout Asia.
“This lowered rate is clearly intended to make the US a more attractive target for foreign investment as well as to encourage American businesses to increase their investments in America.”
The revision might also bring tax benefits to several members of Congress, according to financial disclosures they have filed that reflect ownership of pass-through firms with real estate holdings. One such policymaker, the Republican senator Bob Corker of Tennessee, who had voted against an earlier version of the legislation, said he would support the revised legislation.
Mr Corker said last week that his change of heart had nothing to do with the added benefit for real estate investors. “The suggestion was that it was airdropped into the conference without prior consideration by either the House or the Senate,” Mr Corker said.
Last month, during a speech in St Charles, Missouri, Mr Trump took pains to tell his audience that the tax-overhaul bill would hurt him personally.
“This is going to cost me a fortune, this thing,” he said. “Believe me.”
On Sunday, the White House deputy press secretary Lindsay Walters did not directly address questions about how the added provision would affect Mr Trump or his son-in-law and adviser Jared Kushner, whose family business also has extensive real estate holdings. “The president’s goal in tax reform was to create a bill that gives middle-income families a big tax cut and stimulates economic growth so they can continue to feel that relief for years to come,” Ms Walters said.
The last-minute change to the tax bill – which combined a capital-investment approach that the House favoured with the Senate’s tax-cut mechanism – would, in effect, free up a 20 per cent deduction on passthrough business income that would have been off-limits to many real estate firms under the Senate bill. The change would still leave some investment partnerships out: those that have few employees and invest in tangible property such as land or artwork, said Michael Kosnitzky, a tax partner at Pillsbury Winthrop Shaw Pittman.
The distinction centres on whether tangible property held by a business is “depreciable” – meaning it can be reflected as declining in value over time under accounting rule – even though it may rise in market value. Depreciable property includes apartment buildings, housing complexes, office towers and shopping centres.
Deciding how to tax pass-through entities, which form the backbone of American business, has been one of the most contentious debates among Republican tax writers in their rush to rewrite and notch a major policy win by the end of this year. Such businesses, which also include sole proprietorships and “S corporations”, don’t pay taxes themselves, but pass their income to their owners, who then pay tax at their individual rates.
Because their tax bill would slash the tax rate for “C corporations” – a business type that includes major, publicly traded companies such as ExxonMobil and General Electric – to 21 per cent from 35 per cent, the Republican tax writers have been under
This lowered rate is clearly intended to make the US a more attractive target for foreign investment STEVEN SIEKER Baker McKenzie Tax Practice
pressure to deliver comparable tax relief to pass-through businesses.
The bill seeks to do that by setting up a 20 per cent deduction on pass-through business income – and making it available to both local pizza shop owners and major, nationwide businesses, all while setting up guardrails to prevent owners from mischaracterising high-taxed wage income as lower-taxed income.
The deduction is broadly available to owners of pass-through entities up to an income threshold of $207,500 for singles and $415,000 for couples. After that, limits begin to kick in that would prevent various kinds of “service” providers – including doctors, lawyers, investment advisers and brokers, and professional athletes – from receiving its benefit at higher income amounts.
The Senate approved legislation on December 2 that included a way for owners of large firms with lots of employees to avoid certain income limitations on the deduction: they would be allowed to deduct half of their share of the W-2 employee wages their companies paid out annually. W-2 employees’ payroll taxes are automatically deducted from their pay cheques and then paid to the government through their employer.
That approach would have left out real estate firms, which typically have relatively few employees but large capital investments. For them, the compromise bill offers an additional method: deduct 25 per cent of wages paid, plus 2.5 per cent of the purchase price – or “unadjusted basis” of their tangible, depreciable property.
But no matter the method, owners would be limited to no more than an overall 20 per cent deduction.
Offering the 20 per cent deduction to businesses that do not tend to employ many people is “in a sense contrary to the administration’s job creation policy initiatives”, said Mr Kosnitzsky.
But “many capital-intensive industries are indirect job creators – putting contractors, subcontractors, tradesmen and other to work”, said Ryan McCormick, a senior vice president and counsel at the Real Estate Roundtable, a trade group.
Details of how policymakers decided on their final approach are sketchy. On Sunday, the Senate majority whip John Cornyn suggested the change was made as part of a process to “cobble together the votes we needed to get this bill passed”.
“We were working very hard,” he said. “It was a very intense process.”
The International Business Times, which first reported on the revision’s potential effects on various elected officials, noted that it could benefit several members of Congress who have real estate investments via passthrough businesses. That includes Mr Corker, who was the only Republican senator to vote “no” on earlier Senate legislation. The Senate approved that measure on a 51-49 vote, which set the stage for reaching last week’s final compromise with House leaders.
Mr Corker said last week he would vote “yes” on the new version – a reversal that could be meaningful for the bill’s chances. Republicans hold a slim, 52-seat majority in the 100-seat Senate, and Republican Senator John McCain of Arizona, who is being treated for brain cancer, is not expected to vote this week. Mr Corker’s switch gave GOP leaders an extra measure of certainty.
Mr Corker told Bloomberg on Saturday that he was not aware of the new benefit for real estate investors when he decided to back the final bill based on a two-page summary he had seen. The bill text was released on Friday.
“I have no earthly idea of how that provision – or, candidly, any other provision – made it in,” Mr Corker said. He also said he did not know how the change would affect him financially, adding that “there’s just no way a provision like that would affect me on a big decision like this”.
Mr Corker filed a financial disclosure earlier this year showing that among other interests, he had ownership in Corker Properties X, a partnership that owns a building in Chattanooga, Tennessee, according to local property records. He listed income from the property between $1 million and $5m in 2016. Still, it is not clear how much benefit he might receive from the bill.
Mr Corker cited concerns about the deficit for his previous opposition, and tax writers have done nothing to alleviate the deficit impact. The Congressional budget office estimated late on Friday that the revised measure would increase federal deficits by $1.45 trillion over 10 years, a projection that’s slightly higher than for the version Mr Corker opposed previously.
The senator acknowledged that his deficit argument was unsuccessful, but said he had concluded that the bill’s overall effect would stimulate economic growth for both corporations and small businesses.
“All of that seems worth the risk,” Mr Corker said.