A Conference Committee is Ahead for Tax Reform Bills

The Senate has passed its version of comprehensive tax reform legislation, setting the stage for a conference committee with the House, which passed a similar bill in November. A conference committee, composing Democratic and Republican members from both legislative bodies, will iron out differences between both bills and issue a conference report, which must then be adopted by both the House and the Senate before the final legislation can be sent to the president for signature.

Both the House and Senate bills aim to simplify the tax code and provide growth-boosting tax relief. Importantly, both are consistent with NAIOP advocacy on issues critical to the commercial real estate industry, including on Section 1031 like-kind exchanges, carried interest taxation for real estate partnerships, and the continued deductibility of business interest expense for real estate firms.

The Senate bill differs from the House version in several areas important to the industry.  For example, regarding pass-through businesses, the Senate bill establishes a 23 percent deduction for most pass-through income, while the House bill establishes a new pass-through rate of 25 percent. The Senate bill would limit the deduction to half of the W-2 wages of the pass-through entity or its share to the individual taxpayer. The House version is preferable since much of commercial real estate development activity involves payments to non-employees and contractors, such as architects and engineers.

In addition, the Senate bill would maintain the 20 percent historic preservation tax credit for rehabilitation expenditures of certified structures. However, the credit would have to be taken over five years, at 4 percent each year. The current 10 percent credit for non-certified structures would be eliminated in the Senate version. The House would have eliminated the credit entirely.

As the conferees work through the differences between both versions of tax reform, NAIOP will continue to advocate on behalf of the industry on pass-through taxation provisions, and for maintaining current law on the historic preservation tax credit, as well as issues that may arise that have an impact upon the industry.