Senate Tax Reform Legislation Retains LIHTC and Private Activity Bonds, Preserves 2018-19 NMTC Allocations Rounds, and Reduces HTC to 10 Percent

Published by Michael J. Novogradac on Friday, November 10, 2017 - 12:00AM

[Updated: 2017-11-20 8:32 a.m.]

Yesterday the Senate Finance Committee released tax reform legislation and summary documents, which is expected to be considered in committee starting on Nov. 13.  The legislation is much better for affordable housing, community development, historic preservation, and renewable energy than the House tax reform legislation, which the Ways and Means Committee favorably reported to the full House today.

Affordable Housing

Like the House bill, the Senate legislation retains the low-income housing tax credit (LIHTC) , a tremendous achievement for the affordable housing community. The only other corporate tax credit the framework explicitly proposed to retain is the research and development credit. Importantly, and unlike the House bill, the legislation preserves the tax exemption for private activity bonds, including multifamily tax-exempt bonds, which is estimated to finance more than half of all LIHTC-financed affordable homes annually.

It should be noted that under a lowered corporate rate, the value of LIHTC is reduced. LIHTC stakeholders advocated Congress consider a two-step proposal offsetting the effect of a lowered corporate rate and other code changes on LIHTC investment and production. That proposal was not included in the Senate bill, but it is expected to be considered during Senate Finance Committee consideration.

Historic Preservation and Community Development

Again unlike the House bill, the Senate tax reform legislation would preserve the 2018-2019 new markets tax credit (NMTC) allocation rounds as authorized under current law. While the Senate bill retains the historic tax credit (HTC) in the code, it reduces the percentage of qualified rehabilitation expenses eligible for the credit from 20 percent to 10 percent.  Furthermore, it would repeal the non-historic rehabilitation tax credit for pre-1936 properties.

Renewable Energy

The Senate bill would maintain the renewable energy investment tax credit (ITC) and production tax credit (PTC) current law five-year phasedowns without any changes. The bill does not adopt the inflation adjustment or continuous construction requirement changes included in the House bill. However, the Senate legislation does not extend “orphaned” RETC technologies at the current law ITC phasedown schedule, which is included in the House bill.

Inflation factors

Similar to the House bill, the legislation proposes to use an alternate measure of inflation for indexing tax brackets and other tax parameters, replacing the consumer price index (CPI) inflation factor with “chained CPI.” This would reduce future LIHTC allocations.

This summary highlights key components of the tax reform legislation:

LIHTC

  • Volume cap 9 and 4 percent LIHTC are retained
  • Tax-exempt private activity bonds, including multifamily bonds are preserved

NMTC

  • Legislation would retain current law NMTC allocation rounds in 2018-2019

HTC

  • HTC percentage would be reduced from 20 percent to 10 percent
  • Legislation would repeal 10 percent non-historic rehabilitation tax credit for pre-1936 properties

RETC

  • Legislation retains current law phasedowns of the 30 percent ITC and PTC.
  • “Orphaned” RETC technologies are not extended at ITC phasedown schedule

Business

  • Top corporate rate of 20 percent starting in 2019
  • Individuals can deduct 17.4 percent of adjusted business income (from pass-throughs and Schedule Cs)
  • Deduction of interest expense for businesses 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

  • Interest deductibility limitation does not apply to real estate
  • Residential and nonresidential real property depreciation reduced to 25 years apparently only if partnership does not elect out of the interest deductibility limitation
  • 1031 “like-kind” exchanges are retained only for real property

Individual

  • Individual rates of 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent and 38.5 percent
  • Doubled standard deduction
  • $1,650 child tax credit
  • Individual AMT repealed
  • Municipal bond income tax exemption retained
  • State and local tax deduction—income and property tax—repealed
  • Mortgage interest (MID) and charitable giving deductions generally retained unchanged
    • However both deductions are effectively limited by increased standard deduction and other repealed deductions
  • Earned Income Tax Credit is retained
  • Estate tax exemption threshold doubled, but maintained in the tax code

International

  • Territorial international tax system with repatriation tax rates for accumulated liquid and illiquid assets
  • Base erosion rules to protect the tax base

Other

  • Inflation factors in tax code changed to “chained” CPI

Next Steps

The release of Senate tax reform legislation continues the expedited pace of congressional deliberation on tax reform. The Senate Finance Committee is expected to consider its bill the week of Nov. 13.  We also expect the Senate Energy Committee to consider legislation to open up to Arctic National Wildlife Refuge to oil drilling the week of Nov. 13.  If both Senate committees their respective bills that week as expected, the Senate Budget Committee would combine them into one reconciliation bill for the full Senate to consider.  Wall Street Journal reported Senate Majority Whip John Cornyn, R-Texas, as saying he expects the full Senate to consider the reconciliation bill after Thanksgiving.

Meanwhile the full House is expected to consider the Ways and Means Committee-approved tax reform bill also the week of Nov. 13, with final votes on passage expected on Thursday, Nov. 16 or Friday, November 17, just prior to the Thanksgiving recess.

If this time frame holds, that would leave December for the House and Senate to reconcile differences between the tax reform bills, and significant differences are expected. Like the deliberation on the fiscal year 2018 budget resolution, it is possible the Senate may include a last-minute package of House-requested changes to the Senate tax reform bill prior to full Senate passage.  That would enable the House to pass whatever the Senate passes and expedite enactment of the bill.  The end goal would be to send a final tax reform bill to the president by the end of the calendar year.

Given the difficulties of tax reform and the substantial differences between the House and Senate bills, it will extremely hard for Congress to maintain this schedule, and it may slip to 2018. However, Congress is also under extreme pressure to pass tax reform, and community development tax credit advocates should take the aggressive schedule seriously.

Stay tuned.

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