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House-Senate Conferees Approve Tax Cuts and Jobs Act
(as of 2017-12-15 7:05 p.m. ET)
The House-Senate Conference Committee today approved the conference report containing the final version of the Tax Cuts and Jobs Act by a party-line 17-12 vote. The bill now goes to the full House and Senate next week for final passage, which is expected next week. The lone Republican to vote against the Senate bill, Sen. Bob Corker, R-Tenn., today announced his support for the final bill.
The final tax bill represents a compromise between the versions passed by the House on Nov. 16 and the Senate on Dec. 2. This initial overview highlights changes relevant to tax credits. More detailed discussion and analysis will be presented in future podcast, articles and the Novogradac Tax Cuts and Jobs Act Webinar: What the Tax Credit Community Needs to Know webinar on Dec. 21.
Private Activity Bonds
Much to the relief of the affordable housing community, despite being repealed in the House bill the tax exemption for private activity bonds (PABs) is retained in the final tax reform bill, as it was in the Senate bill.
The provision from Sen. Pat Roberts, R-Kan., that would have replaced the existing law exception to the low-income housing tax credit (LIHTC) general public use requirement for existing and future artist housing properties with a new exception for veterans, and provided automatic eligibility for a 25 percent basis boost to 9 percent LIHTC developments located in rural areas as defined under section 520 of the Housing Act of 1949 was not included in the final bill. Roberts originally proposed to offset the cost of providing the automatic boost eligibility for rural properties by reducing the basis boost percentage for all properties—urban, suburban, rural, 9 percent and 4 percent—from 30 to 25 percent. That offsetting provision was also not included.
The House bill contained no provisions directly affecting LIHTC and its authoring statute in section 42 of the Internal Revenue Code.
To the relief of new markets tax credit (NMTC) advocates, the final tax bill adopts the Senate bill position on NMTC, retaining the 2018 and 2019 annual allocation rounds at $3.5 billion each. The House bill would have repealed the NMTC after 2017. However, as noted below, the NMTC cannot offset the BEAT.
The final bill retains the historic tax credit (HTC) as modified by the Senate bill. Investors would claim the HTC over five years instead of at placed in service as current law, subject to transition rules. The House bill would have repealed the credit after 2017. The final bill repeals the non-historic rehabilitation tax credit for non-residential pre-1936 properties, subject to transition rules. Additional clarity is needed for the new 20 percent HTC transition rule. However, as noted below, the HTC cannot offset the BEAT.
The final bill retains the renewable energy investment tax credit (ITC) and production tax credit (PTC) without any changes to current law, as in the Senate bill. The House bill eliminated the PTC inflation adjustment and changed the continuous construction requirement.
Base Erosion and Anti-abuse Tax (BEAT)
To protect the tax base of foreign-owned corporations or U.S. corporations with significant foreign operations, the Senate bill imposed essentially an international alternative minimum tax on those corporations. That “base erosion minimum tax” likely would prevent several significant corporate investors from claiming tax credits like the LIHTC, NMTC, HTC, ITC, and PTC. The House bill contained a provision that also aimed to protect the U.S. tax base, but it would not have harmed tax credit investment.
While the final tax bill adopted the Senate approach, it provided some relief to LIHTC, ITC, and PTC investors by allowing them to generally benefit from at least 80 percent of their tax credits in spite of owing a BEAT liability.
Alternative Minimum Tax (AMT)
The final bill retains the alternative minimum tax (AMT) for individuals but increases the AMT exemption amounts and phase-out thresholds. However, the final bill eliminates the corporate AMT. The Senate bill had retained the corporate AMT, which would have adversely affect existing and future NMTC investments, as the NMTC cannot be used to reduce the corporate or individual AMT. Furthermore, the final six years of the PTC also cannot be used to reduce AMT liability. Fortunately, thanks to the Housing and Economic Recovery Act of 2008, the LIHTC and HTC can be taken against corporate and individual AMT.
This summary highlights key components of the tax reform legislation:
- 9 and 4 percent LIHTC are retained
- Tax-exemption for private activity bonds, including residential rental bonds, are preserved
- No change to basis boost or general public use requirement safe harbor
- Legislation would retain current law NMTC allocation rounds in 2018-2019
- HTC retained at 20 percent, but taken over five years, subject to transition rules
- Legislation would repeal 10 percent non-historic rehabilitation tax credit for pre-1936 properties, subject to transition rules
- Legislation retains current law phasedowns of the 30 percent ITC and PTC.
- No change to PTC inflation adjustment or continuous construction requirement
- “Orphaned” RETC technologies are not extended at ITC phasedown schedule
- Top corporate rate of 21 percent starting in 2018
- Pass-through entities allowed a 20 percent deduction, with limits tied to qualified business income and taxable income
- Deduction of interest expense limited to 30 percent of adjusted taxable income.
- Immediate expensing of assets for new investments made after Sept. 27, 2017, for at least five years (not including buildings)
- Corporate alternative minimum tax (AMT) repealed
General Real Estate
- Real estate may elect out of interest deductibility limitation
- Residential and nonresidential real property depreciation maintained at 27.5 years and 39 years respectively only if partnership does not elect out of the interest deductibility limitation
- But if one elects out of interest deductibility limitation, 30 year residential real property and 40 year nonresidential real property depreciation lives apply
- 1031 “like-kind” exchanges are retained only for real property
- Individual rates of 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent
- Increased standard deduction to $12,000 for individuals and $24,000 for married couples
- $2,000 child tax credit
- Individual AMT exemption and phaseout thresholds increased
- Municipal bond income tax exemption retained
- State and local tax deductions—income, sales and property tax—capped at $10,000
- Cap on mortgage interest deduction (MID) for new first and second home purchases reduced to $750,000 from $1 million
- Charitable deduction limits increased
- Earned Income Tax Credit is retained
- Estate tax exemption threshold doubled, but maintained in the tax code
- Territorial international tax system with repatriation tax rates for accumulated liquid and illiquid assets
- Base erosion and anti-abuse tax (BEAT) to protect the tax base
- Corporations generally benefits from at least 80 percent of LIHTC, ITC and PTC, even if they have a BEAT liability while the credit that do not generate a benefit can be carried forward
Inflation factors in tax code changed to “chained” CPI