2/20/2018

1

How Does Tax Reform Affect Real Estate Developers & Investors?

F E B R U A RY 2 0 , 2 0 1 8

TO RECEIVE CPE CREDIT• Participate in entire webinar

• Answer polls when they are provided

• If you are viewing this webinar in a group Complete group attendance form with

• Your printed name, signature & email address

All group attendance sheets must be submitted to training@bkd.com within 24 hours

of live webinar

Answer polls when they are provided

• If all eligibility requirements are met, each participant will be emailed their

CPE certificate within 15 business days of live webinar

2/20/2018

2

INTRODUCTIONSScott HumphreyDirector Dallas, TX

Michael HillDirectorJackson, MS

Please add Picture

1 Quick overview & hot takes

Closer look at

• Depreciation changes

• Net interest rules

• New 20 percent pass-through deduction

Choice of entity considerations after the TCJA

2

3

WHAT WE’LL COVER TODAY

2/20/2018

3

TAX RATESCorporate

Corporate Tax RateFlat rate of 21 percent effective January 1, 2018(Previously top rate of 35 percent)

Alternative Minimum TaxRepealed(Previously 20 percent)

Personal Service CorporationsFlat rate of 21 percent effective January 1, 2018(Previously flat rate of 35 percent)

TAX RATESTax brackets: single

2018 Ordinary Rates 2018 Capital Gains RatesBracket Previous

Tax Law*New Tax

Law*^Previous Tax Law*

New Tax Law*^

$0–$9,525 10% 10% 0% 0%

9,526–38,600 15% 12% 0% 0%

38,601–38,700 15% 12% 0% 15%

38,701–82,500 25% 22% 15% 15%

82,501–93,700 25% 24% 15% 15%

93,701–157,500 28% 24% 15% 15%157,501–195,450 28% 32% 15% 15%195,451–200,000 33% 32% 15% 15%200,001–424,950 33% 35% 15% 15%424,951–425,800 35% 35% 15% 15%

425,801–426,700 35% 35% 15% 20%

426,701–500,000 39.6% 35% 20% 20%More than 500,000 39.6% 37% 20% 20%

*Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000)

^Expires after December 31, 2025

2/20/2018

4

TAX RATESTax brackets: married filing jointly

2018 Ordinary Rates 2018 Capital Gains RatesBracket Previous

Tax Law*New Tax

Law*^Previous Tax Law*

New Tax Law*^

$0–$19,050 10% 10% 0% 0%

19,051–77,200 15% 12% 0% 0%

77,201–77,400 15% 12% 0% 15%

77,401–156,150 25% 22% 15% 15%

156,151–165,000 28% 22% 15% 15%

165,001–237,950 28% 24% 15% 15%237,951–315,000 33% 24% 15% 15%315,001–400,000 33% 32% 15% 15%400,001–424,950 33% 35% 15% 15%424,951–479,000 35% 35% 15% 15%

479,001–480,050 35% 35% 15% 20%

480,051–600,000 39.6% 35% 20% 20%More than 600,000 39.6% 37% 20% 20%

*Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000)

^Expires after December 31, 2025

LIMITATIONS ON LOSSES

Net Operating Loss (NOL)

• Deduction limited to 80 percent of taxable income(1)

• No carryback (except property/casualty insurance companies & certain farm losses)(2)

• Carried forward indefinitely(2)

Excess Business Loss Limitation

• Aggregate deductions attributable to trades or businesses over aggregate gross income & gain limited to $250,000 single/$500,000 married filing jointly (MFJ)

• Excess loss treated as NOL

• Sunsets December 31, 2025

(1) Applies to losses arising in tax years beginning after December 31, 2017(2) Applies to losses arising in tax years ending after December 31, 2017

2/20/2018

5

OTHER CONSIDERATIONS

Carried Interest

• Partnership profits interest in connection with performance of services

• Long-term capital gain rate after three-year holding period with respect to any applicable partnership interest

• Does this apply to IRC Sec. 1231 gains?

Like-Kind Exchange

• Deferral of gain limited to real property not held primarily for sale

• How does this impact properties that had a cost segregation study?

OTHER CONSIDERATIONS

State & Local Income/Sales, Real Estate & Personal Property Tax Expense

• Combined deduction for amounts not paid or accrued in a trade or business capped at $10,000

• Amounts paid in 2017 for income taxes imposed for 2018 or later treated as paid in 2018

• Consider election to capitalize real estate taxes, interest &/or carrying charges

2/20/2018

6

OTHER CONSIDERATIONS

Other Items

• No change to Low-Income Housing Tax Credits

• Rehabilitation credit only eligible for qualified rehabilitation expenditures with respect to historic structures & claimed over five-year period

• Non-taxable contributions of capital grandfathered

• Removal of technical terminations

QUALIFIED OPPORTUNITY ZONES & FUND

Qualified Opportunity Zones & Fund

• QO Zone yet to be named, but will be low-income census tracts identified by states

• QO Fund: corporation or partnership that invests in QO Zone property

• QO property not limited to real estate QO Zone business: substantially all of

tangible property owned or leased is QO Zone business property

Cannot be golf course, country club, gaming, etc.

2/20/2018

7

QUALIFIED OPPORTUNITY ZONES & FUND

• Temporary deferral of capital gain (not limited to capital assets) Sale to unrelated party 180-day reinvestment of gain directly in

fund Deferral ends on earlier of date of next

sale, or 2026 Percentage of deferred gain recognized

depends on holding period• < 5 years: 100 percent• > 5 but < 7 years: 90 percent• > 7: 85 percent

Permanent exclusion of gain on sale of QO Fund• Appreciation in the investment• 10-year hold requirement

Bonus Depreciation

• 100 percent through 2022 for qualified property placed in service after September 27, 2017

• 80, 60, 40 & 20 percent for property placed in service in 2023–2026, respectively

• Definition of qualified property expanded by removing requirement that original use begin with taxpayer

• Specified property included & excluded

(Previously 40, 30 & 20 percent bonus depreciation for qualified property in 2018–2020, respectively; property must be new to qualify)

DEPRECIATIONPROVISIONSCost recovery

2/20/2018

8

Qualified Improvement Property

• Effective January 1, 2018

• Removed qualified leasehold, restaurant & retail

• Any improvement to an interior portion of a building that is nonresidential real property

• 15-year straight-line depreciation (40 year ADS)

• Drafting error

DEPRECIATIONPROVISIONSCost recovery

Section 179 Expensing

• Up to $1 million

• Phaseout beginning at $2.5 million of assets placed in service

• Definition of qualified property expanded to include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security systems

(Previously up to $520,000; phaseout beginning at $2,070,000 of assets placed in service)

DEPRECIATIONPROVISIONSCost recovery

2/20/2018

9

• Deduction generally limited to sum of Business interest income

Floor plan financing interest

30 percent of “adjusted taxable income” BUSINESS INTEREST EXPENSE DEDUCTION

Taxable income

+/- Items of income, gain, deduction or loss not properly allocable to trade/business

+ Business interest expense

- Business interest income

+ Net operating loss

+ Pass-through business deduction

+ Depletion, depreciation & amortization (taxable years beginning before January 1, 2022, only)

BUSINESS INTEREST EXPENSE DEDUCTION

• Excess carried forward indefinitely

• Limit does not apply to

Businesses with average annual gross receipts ≤ $25 million (affiliated group basis)

Regulated public utility business (including electric cooperatives)

Following businesses may elect not to be subject to limitation provided they use ADS method for depreciation• Real property businesses

• Farming businesses (including agricultural & horticultural cooperatives)

2/20/2018

10

Real Property Business Election

• Real property trades can elect out of provision

Requires depreciation of residential & nonresidential property under ADS lives (30 & 40 years respectively)

• What trades qualify?

Real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business

What about medical facilities or assisted living?

NET INTEREST LIMITATION

NET INTEREST LIMITATIONExample 1

Facts• Partnership

• No real estate election made

• For tax year ending December 31, 2018 Taxable Income of $30,000 (before interest limitation)

Depreciation Expense of $100,000 (3,900,000 building)

Interest Expense of $70,000

Net Interest Limitation of $60,000• Adjusted Taxable Income

• 30% of Adjusted Taxable Income

• Actual Taxable Income

• Interest Expense Carryover

$200,000 ($30,000 +100,000 + 70,000)

$60,000

$40,000

$10,000

2/20/2018

11

NET INTEREST LIMITATIONExample 2

Facts• Partnership

• Real estate election made

• For tax year ending December 31, 2018 Taxable Income of $32,500 (before interest limitation)

Depreciation Expense of $97,500 (3,900,000 building)

Interest Expense of $70,000

Net Interest Limitation of $0• Adjusted Taxable Income

• 30% of Adjusted Taxable Income

• Actual Taxable Income

• Interest Expense Carryover

$200,000 ($32,500 +97,500 + 70,000)

N/A

$32,500

$0

20% QBI

Domestic income?

NO DEDUCTION

Qualified business income (QBI)?

Specified servicetrade/business?

Taxable income < threshold?(1)

NO

YES

20% QUAL REIT DIVS. 20% QUAL PTP INCOME20% QUAL CO-OP DIVS (4)

50% W-2 WAGESOR

REDUCED DEDUCTION

++

25% W-2 WAGES + 2.5% QUAL PROPERTY

OR

GREATER OF

DEDUCTION(3) = 20% QBI

DEDUCTION(3) = LESSER OF

YES

YES

YES

NO

Taxable income > full phaseout?(2)

NO

NO

NO

(1) $157,500 (single) | $315,000 (married filing jointly (MFJ)), indexed(2) $207,000 (single) | $415,000 (MFJ), indexed

(3) Limited to 20 percent of excess of taxable income over the sum of any net capital gain(4) Limited to taxable income less net capital gain

20% QUAL REIT DIVS. 20% QUAL PTP INCOME20% QUAL CO-OP DIVS (4)

Noncorporate taxpayer?

PASS-THROUGH BUSINESS DEDUCTION

YES

NO

NO

YES

Taxable income > full phaseout?(2)

YES

2/20/2018

12

• Domestic: effectively connected with conduct of trade/business within U.S. & Puerto Rico

• Qualified business income: net amount of items of income, gain, deduction & loss with respect to any qualified trade or business, except Reasonable compensation

Guaranteed payments

Investment income• Short-term & long-term capital gain/loss

• Dividend income

• Interest income

(Note overall loss treated as loss for purposes of calculation in subsequent year)

QUALIFIED BUSINESS INCOME DEDUCTIONSunsets 12/31/2025

• Specified service business: Any trade or business involving performance of services in fields of

QUALIFIED BUSINESS INCOME DEDUCTIONSunsets 12/31/2025

Health

Law

Accounting

Actuarial science

Performance arts

Investing & investmentmanagement, trading or dealing in securities, partnership interests or commodities

Consulting

Athletics

Financial services

Brokerage service

Principal asset is reputation or skill of one or more of its employees or owners

2/20/2018

13

• Need further guidance in several areas Definition qualified trade or business

Application of grouping elections

Clarification on how definition of specified service trade or business applies

Whether wages paid by an affiliated management company count for purposes of wage limitation

• Possible technical corrections Deduction for sales to farm cooperatives

Impact on choice of entity

QUALIFIED BUSINESS INCOME DEDUCTIONSunsets 12/31/2025

• Limitations: Apply when taxable income exceeds $157,500 single ($315,000 MFJ) & phase out over next $50,000 ($100,000) of taxable income1) Wage limitation: Greater of

50 percent of W-2 wages paid with respect to business OR

25 percent of W-2 wages paid plus 2.5 percent of unadjusted basis (immediately after acquisition) of all qualified property

2) Not allowed for “specified service trade or businesses” once income exceeds threshold amounts

QUALIFIED BUSINESS INCOME DEDUCTIONSunsets 12/31/2025

2/20/2018

14

Facts• Rental Partnership

• 2 partners 50/50

• Real Estate Election

• No employees

• No QBI loss carryover

• For tax year ending December 31, 2018 Taxable income of $200,000

Compensation to owner: $0

Qualified business income of $200,000

Depreciable cost of real estate $10,000,000

Allocable qualified business income deduction = $20,000• 20 percent of QBI

• 50 percent of W-2 wages

• 25 percent of W-2 wages + 2.5 percent of unadjusted basis of qualified property

$20,000

$0 ($0 x .50 = $0)

$125,000 ($5,000,000 x .025 = $125,000)

QUALIFIED BUSINESS INCOME DEDUCTIONExample 1

Facts• Rental Partnership

• 2 partners 50/50

• Real Estate Election

• No employees

• QBI loss of $50,000

• For tax year ending December 31, 2018 Taxable income of $200,000

Compensation to owner: $0

Qualified business income of $200,000

Depreciable cost of real estate $10,000,000

Allocable qualified business income deduction = $10,000• 20 percent of QBI

• 50 percent of W-2 wages

• 25 percent of W-2 wages + 2.5 percent of unadjusted basis of qualified property

$10,000 (($100,000 - $50,000) x .20 = $10,000)

$0 ($0 x .50 = $0)

$125,000 ($5,000,000 x .025 = $125,000)

QUALIFIED BUSINESS INCOME DEDUCTIONExample 2

2/20/2018

15

APPROACH TO PLANNING AFTER TCJA

Step 1 Step 2 Step 3

Review your current income tax situation

Understand how tax changes affect you & your business in 2017 & beyond

Evaluate accounting methods & possibility of future guidance before filing 2017 tax returns

APPROACH TO PLANNING AFTER TCJA

Step 4 Step 5 Step 6

Consider how tax law changes affect 2018 estimated tax payments

Review choice of entity considerations under new tax law

Evaluate other strategies to plan for new tax law

2/20/2018

16

More Clarity Ahead

1. Resource Center• bkd.com/taxreform

2. Simply Tax Podcast• bkd.com/simplytax

3. BKD Thoughtware®

• bkd.com

Questions?

2/20/2018

17

CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org

CPE CREDIT

• CPE credit may be awarded upon verification of participant attendance

• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com

2/20/2018

18

The information contained in these slides is for your information only, based on data available as of the date of the presentation & is not to be considered as tax or legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. We are under no obligation to update these slides if changes occur. Consult your BKD advisor before acting on any matters covered.

Thank You!Scott Humphrey | shumphrey@bkd.com

Michael Hill | mhill@bkd.com

2/20/2018

19

ABOUT BKD

BKD now has more than 2,600 CPAs, advisors & dedicated staff members working together to serve you. Our expertise goes well beyond the standard accounting services to include risk management, forensic & valuation services, technology & wealth management.

Personalized Service with a Global ReachOur trusted advisors offer solutions for clients in all 50 states & internationally. With 36 offices in 16 states, BKD & its subsidiaries combine the insight & ideas of multiple disciplines to provide solutions in a wide range of industries.

2/20/2018

20