Tax Cuts and Jobs Act Changes Impacting Real Estate. Presented by: Sefi Silverstein, CPA Len Nitti, CPA, MST

Transcription

1 Tax Cuts and Jobs Act Changes Impacting Real Estate Presented by: Sefi Silverstein, CPA Len Nitti, CPA, MST

2 Our Speakers Sefi Silverstein, CPA Len Nitti, CPA, MST 2

3 Housekeeping To submit questions use the questions pane in the GoToWebinar dashboard on your screen. We will attempt to answer as many questions as possible In order to obtain credit for CPE/CLE answer all polling questions Kindly complete the survey that will be ed after the presentation This webinar is being recorded and will uploaded to 3

4 Agenda Depreciation Provisions Qualified Business Income Deduction Business Loss Limitation Net Operating Loss Deduction Deduction for Net Business Interest Miscellaneous Provisions: Carried Interest Section 1031 Exchanges Rehabilitation & Historic Tax Credits Meals & Entertainment 4

5 DEPRECIATION PROVISIONS 5

6 Depreciation Methods MACRS GDS- Modified Accelerated Cost Recovery System / General Depreciation System Assets are assigned to a specific asset class Assets are assigned specific useful lives Accelerated Methods: Section 179 Bonus Depreciation ADS- Alternative Depreciation System A decelerated method required to be used in special circumstances 6

7 Depreciable Lives Depreciable Life/Years Land 0 Building Commercial 39 Building - Residential `27.5 Furniture 7 Equipment 5 Land improvements 15 Leasehold Improvements 15 / 39 7

8 Qualified Leasehold Improvements (QLI) Pre-Act Law: Improvement that is made to the interior portion of nonresidential (commercial) real property Pursuant to a lease whereby lessee will exclusively occupy the property Improvement must be placed in service more than three years after building was first placed in service Must be new 15 year recovery period Eligible for Section 179 8

9 Qualified Leasehold Improvements (cont.) Pre-Act Law (cont.): Leases between related persons don t qualify Does not include improvements for: Enlargement of building Elevator or escalator Internal structural framework of building Structural component benefiting a common area 9

10 Qualified Improvement Property (QIP) Pre-Act Law: In 2015 a new category of realty was added by the PATH Act Like QLI, must be to the interior portion of a non-residential building Differences between QLI and QIP: No three year waiting period Does not have to be pursuant to a lease Not eligible for Section 179 Eligible for bonus depreciation 39 year recovery period Effective for property placed in service after December 31,

11 Section 179 Expensing Pre-Act Law: Provides for immediate expensing of up to $510,000 of qualified property Deduction begins to phase out when purchases exceed $2.03M Qualified property: Tangible personal property with recovery period of < 20 years Can be new or used property Non-customized off-the-shelf computer software Certain nonresidential real property improvements (QLI) States may differ: New Jersey & PA limit Section 179 deduction to $25,000 New York follows Federal limits

12 Section 179 Expensing (cont.) Pre-Act Law (cont.): Section 179 property must be acquired for use in the active conduct of a trade or business Generally cannot be claimed by rental properties Except for QLI, qualified restaurant property, and qualified retail improvement property Component members of a controlled group are treated as a single taxpayer Multiple members are required to determine which member would use the Sec. 179 deduction. 12

13 Expansion of 179 Expensing Tax Cuts and Jobs Act: Provides for immediate expensing of up to $1,000,000 of Section 179 property Phase out threshold increasing to $2.5M Expanded qualifying property to include roofs, qualified energy efficient heating and air-conditioning property, fire protection/alarm systems, and security systems (nonresidential) Applicable for property placed in service in tax years beginning after December 31, 2017

14 Section 179 Expensing- Impact on Residential Property Pre-Act Law: Property was ineligible for Section 179 if it was included in any of the categories of property described in Code Sec. 50(b) This code section applies to property that was ineligible for the investment credit (re-habilitation & energy-related credits), and therefore ineligible for Section 179 Included in this exclusion category was: (4) property used predominantly to furnish lodging (e.g., apartment buildings and dormitories). 14

15 Section 179 Expensing- Impact on Residential Property (cont.) Tax Cuts and Jobs Act: Excepts property described in Code Sec. 50(b)(2) from the ineligibility of property described in Code Sec. 50(b) to be Section 179 property This change expands the definition of section 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with the furnishing of lodging For items with a cost of < $2,500 immediate expensing is already available under the annual election of the de minimis rule 15

16 Bonus Depreciation Pre-Act Law: Provides for the immediate expensing of 50% of the adjusted basis of qualifying property placed in service by December 31, 2017: Must be new property Qualifying property includes tangible personal property with recovery period of < 20 years, non-customized off-the-shelf computer software, and certain building improvements (QIP) There was no rule that excepted property from qualified property status based on the property's use in an ineligible trade or business (i.e., rental) Property required to be depreciated under the ADS not eligible Scheduled to phase down to 40% in 2018 and 30% in States may differ: New Jersey, New York & PA do not recognize bonus depreciation

17 Bonus Depreciation (cont.) Tax Cuts and Jobs Act: Provides for immediate expensing of 100% of the adjusted basis of qualifying property No longer needs to be NEW property Acquired and placed in service after 9/27/2017 and before 1/1/2027 An electing real property trade or business is excluded from bonus depreciation Deduction is phased down for tax years (80%, 60%, 40%, 20%) with complete repeal after 2026

18 Recovery Period for Real Property Shortened Tax Cuts and Jobs Act: Eliminates the separate definitions for qualified leasehold improvement, qualified restaurant, and qualified retail improvement property everything is considered qualified improvement property Depreciable using 15 year straight-line method ADS recovery periods: ADS recovery period for non-residential rental property remains 40 years ADS recovery period for residential rental property is shortened to 30 years ADS recovery period for qualified improvement property is shortened to 20 years

19 Polling Question 1 Under the new law, the Bonus depreciation write-off for qualifying assets is: A. 80% B. 50% C. 100% D. 0% 19

20 QUALIFIED BUSINESS INCOME DEDUCTION 20

21 Qualified Income Business Deduction Available to non-corporate taxpayers Deduction of up to 20% of qualified business income Income must come from a qualified trade or business 21

22 Qualified Trade or Business Any trade or business other than specified service trades or businesses and performing services as an employee Specified service trades or businesses include: Health, Law, Accounting, Actuarial Science, Consulting, Performing Arts, Financial Services, Brokerage Services, and any trade or business where the principal asset is the reputation or skill of 1 or more of its employees/owners, or any trade or business which involves performance of services that consist or investing and investment management Real estate? 22

23 Trade or Business Requirement Activity carried on to make a profit Conducting regular activities and transactions Real Estate Professional Safe harbor for Net Investment Income Tax 500 hour test Grouping of activities

24 Exception for Small Service Businesses Taxpayer whose taxable income does not exceed the threshold amount will qualify Threshold amount - $157,500 ($315,000 MFJ) Phase-in of limit for taxpayers whose taxable income does not exceed threshold amount by more the $50,000 ($100,000 MFJ) Amount is indexed for inflation after

25 Qualified Business Income Net amount of qualified items of income, gain, deduction and loss relating to any US qualified trade or business of the taxpayer Items not considered qualified: Capital gains and losses Dividends Interest income unless properly allocable to a trade or business Other investment income/expense items Reasonable compensation/guaranteed payment to owner PTP Income IRS may reclassify partnership/s corp income to comp 25

26 Qualified Business Income Amount Deduction is limited to the lesser of A or B: A. 20% of the taxpayer s qualified business income, or B. The greater of: 1. 50% of the W-2 wages of the qualified trade or business, or 2. The sum of 25% of W-2 Wages plus 2.5% of unadjusted basis of qualified property Plus, 20% of qualified REIT dividend and PTP income Deduction is calculated for each trade/business of the taxpayer 26

27 Definitions Qualified property Depreciable property held by qualified business for the production of qualified income for which depreciable period has not ended Depreciable period Later of 10 years asset was placed in service or the last day of the last full year in the applicable recovery period Qualified REIT Dividend Any dividend from REIT that is not a capital gain dividend or qualified dividend Qualified PTP Income Qualified business income of PTP plus ordinary income recognized on sale of PTP 27

28 Example Taxpayer, an individual, owns an apartment complex which has $2 million of net business income (which paid $200,000 in wages) and, has $10 million of qualified property. What is the taxpayer s qualified business income deduction? 28

29 Example (cont.) Lesser of A or B: A. 20% of $2 million = $400,000, or B. The greater of: 1. 50% of $200,000 = $100,000, or 2. 25% of $200,000 ($50,000) + 2.5% of $10 million ($250,000) = $300,000 Qualified Income Business Deduction is $300,000 29

30 Exception to the Wage/Basis Limitation Taxpayers whose taxable income does not exceed the threshold amount Threshold amount - $157,500 ($315,000 MFJ) Phase-in of limit for taxpayers whose taxable income does not exceed threshold amount by more the $50,000 ($100,000 MFJ) Amount is indexed for inflation after

31 Taxable Income Limitation Deduction is limited to the sum of: A. The lesser of: 1. The combined qualified business income amount, or percent of the excess of taxable income over net capital gain B. The lesser of: percent of qualified cooperative dividends, or 2. Taxable income 31

32 Example Individual A has a qualified business income amount of $100,000 and taxable income of $800,000, which includes $400,000 of long-term capital gains. What is Individual A s qualified business income deduction? 32

33 Example (cont.) Deduction is the lesser of: 1. $100,000, or 2. ($800,000 - $400,000) x 20% = $80,000 Deduction is limited to $80,000 33

34 Application to Tiered Entities Qualified Business Income Amount determined on entity by entity basis? Aggregation at upper tier entity? IRS will issue regulations to address rules for tiered entities. 34

35 Qualified Business Losses If the net amount of qualified income from all qualified trade or businesses of the taxpayer is less than zero, the loss is carried to the following tax year Carryover loss only applied to calculation of this deduction 35

36 Polling Question 2 The new Qualified Business Income Deduction: A. Applies to all businesses B. Includes investment income C. Provides a deduction of up to 20% of qualified business income D. Is subject to simple calculations 36

37 BUSINESS LOSS LIMITATION 37

38 Business Loss Limitation Tax Cuts and Jobs Act: Applicable to all non-corporate taxpayers engaged in any business Net business losses are limited to $500,000 for joint filers, or $250,000 for other taxpayers For pass-through entities, this is applicable at the partner/shareholder level Excess businesses losses due to the limitation will be carried forward as a Net Operating Loss (NOL) 38

39 NET OPERATING LOSS (NOL) DEDUCTION 39

40 NOL Deduction Pre-Act Law: Permitted NOLs to be carried back two years and carried forward 20 years The deduction was not subject to a limitation based on taxable income Example: Income (before NOL carryforward) = $1,000,000 NOL carryforward from prior year = $1,500,000 Taxable income = $0 The decision to carryback or carryforward often depends on facts and circumstances

41 NOL Deduction (cont.) Tax Cuts and Jobs Act: Carryback is repealed Carryforward period is indefinite Provision limits NOL deduction to 80% of taxable income NOLs that arose prior to tax year 2018 are grandfathered can still carryback and can still apply to taxable income without limitations NOL s generated in 2017 and prior years will need to be tracked separately from NOL s generated in 2018 and later 41

42 Loss Limitations Example Example (Assume MFJ) 2018 Wages 0 Interest and Dividends 150,000 Capital Gains 250, ,000 Rental Activities: Entities with Rental Losses (2,900,000) Entities with Rental Income 700,000 NET 2018 Rental Losses (2,200, Business Loss Limitation 500,000 (500,000) Business Loss Carryover to 2019 A (1,700,000) 2018 Net Loss B ($100,000) NOL Carryover to 2019: 1) 2018 Excess Business Loss Over Limitation A (1,700,000) 2) 2018 Net Loss B (100,000) Total NOL Carryover to 2019 ($1,800,000) 42

43 Loss Limitations Example Example (Assume MFJ) 2019 Wages 750,000 Interest and Dividends 150,000 Capital Gains 1,000,000 1,900,000 Rental Activities: NET 2019 Rental Losses (1,500,000) 2019 Business Loss limitation 500,000 (500,000) Business Loss Carryover to 2020 A (1,000,000) 2019 Income (Before NOL Deduction) 1,400,000 NOL DEDUCTION for 2019: a NOL Carryover from 2018 (1,800,000) b Deduction- limited to 80% of taxable Income 80%) 1,120,000 (1,120,000) Remaining NOL to Carryover B (680,000) Taxable Income $280,000 NOL Carryover to 2020: 1) 2019 Excess Business Loss Over Limitation A (1,000,000) 2) NOL as of 2019 B (680,000) Total NOL Carryover to 2020 ($1,680,000) 43

44 Loss Limitations Example Example (Assume MFJ) 2020 Wages 750,000 Interest and Dividends 150,000 Capital Gains 1,000,000 1,900,000 Rental Activities: NET 2020 Rental Income 500, Income (Before NOL Deduction) 2,400,000 NOL DEDUCTION for 2020: a NOL Carryover from 2019 (1,680,000) (1,680,000) b Deduction- limited to 80% of Taxable Income 80%) (1,920,000) Taxable Income $720,000 44

45 DEDUCTION FOR NET BUSINESS INTEREST 45

46 Deduction for Net Business Interest (cont.) Tax Cuts and Jobs Act: Applies to all taxpayers (corporate & non-corporate) Under this limitation, the deduction allowed for business interest for the tax year can not exceed: 1. 30% of the taxpayer's Adjusted Taxable Income (but not less than zero), plus 2. Business interest income Adjusted Taxable Income is before interest, depreciation and amortization (NOI) Unused amounts can be carried forward indefinitely 46

47 Deduction for Net Business Interest (cont.) Exceptions to the limitations on business interest deduction: A) Small Business Exception B) Electing Real Property Trades or Businesses 47

48 Deduction for Net Business Interest (cont.) A) Small Business Exception The business interest limitation doesn't apply to a taxpayer that meets the $25 million gross receipts test of Code Sec. 448(c) Taxpayer's average annual gross receipts for the three-tax-year periods ending with the prior tax year do not exceed $25 million Code Sec 448(c )(2) - Aggregation Rules: All persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as one person for purposes of paragraph (1) Section 52(b) All employees of trades or business (whether or not incorporated) which are under common control shall be treated as employed by a single employer 48

49 Deduction for Net Business Interest (cont.) B) Electing Real Property Trade or Businesses An electing real property trade or business isn't a trade or business for purposes of the business interest limitation An electing real property trade or business is any business which: 1. Is in the business of real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business, and 2. Makes an election: a. Election must be made at the time and in the manner that IRS prescribes b. Once made, the election is irrevocable 49

50 Deduction for Net Business Interest (cont.) If an election is made, the electing real property trade or business: Is precluded from bonus depreciation (on realty) Must use the Alternative Depreciation System (ADS) to depreciate its property: Non-residential real property 40 years Residential rental property 30 years Qualified improvement property 20 years Land improvements 20 years 50

51 Deduction for Net Business Interest (cont.) In deciding whether to make an irrevocable election, a taxpayer with a real property trade or business must compare: The extent to which the limitations will affect (i.e., defer) interest deductions, versus The extent to which the taxpayer will have to claim depreciation deductions at a decelerated rate and over a longer period How are current properties, several years into their depreciable lives, impacted? 51

52 Deduction for Net Business Interest (cont.) Taxpayers impacted by entities with limitations may have an offset by entities without limitations 1. Limitation is first determined at the partnership level: Once limitation is applied, partnership will end up with either: a) Excess Taxable Income, or b) Excess Business Interest 2. Limitation is then determined at the partner level: Adjusted taxable income is: a) Increased by Excess Taxable Income allocated to the partner, or b) Excess Business Interest is utilized at the partner level when there is Excess Taxable Income allocated 52

53 Polling Question 3 An Electing Real Property Trade or Business : A. Makes an election to avoid interest limitations B. Cannot use bonus depreciation on realty C. Must use the ADS recovery periods for real property D. All the above 53

54 CARRIED INTEREST 54

55 Carried Interest Applies to partnership profits interests held in connection with performance of services Applies to partnership interests holding specified assets including securities, commodities and real estate held for rental or investment Reclassifies long-term capital gains allocated to profits interests holder to be treated as short-term capital gains Gains are reclassified if the underlying investment is not held for more than 3 years 55

56 SECTION 1031 EXCHANGES 56

57 Section 1031 Exchanges Still applies to real estate transactions No longer available for sales of tangible personal property 57

58 REHABILITATION AND HISTORIC TAX CREDITS 58

59 Rehabilitation and Historic Tax Credits 10% Credit for pre-1936 buildings are repealed 20% Credit for historic structures is retained 20% Historic tax credit must now be taken over a 5 year period Effective for amounts paid or incurred after 12/31/17 Transition rule for buildings owned by the taxpayer on 1/1/18 to allow for the 10% credit 59

60 MEALS & ENTERTAINMENT 60

61 Employer Provided Meals The following are now subject to 50% limitation Food and beverage expenses provided to employees at an employer operated eating facility Meals furnished to employees on the employer s premises for the convenience of the employer Effective January 1, 2018 Effective January 1, 2026 these food and beverage expenses are nondeductible 61

62 Entertainment Expenses Expenses are no longer deducible effective January 1, 2018 Expenses include: An activity generally considered to be entertainment, amusement or recreation Membership dues for any club organized for business, pleasure, recreation or social purposes A facility used in connection with either of the above 62

63 Entertainment Expenses (cont.) Does not apply to: Expenses for recreational, social or similar activities primarily for the benefit of employees Business meetings for employees, stockholders, agents or directors Expenses directly related to the attendance of business meetings or conventions of business league organizations 63

64 Thank You Sefi Silverstein, CPA Shareholder x 165 ssilverstein@wgcpas.com Len Nitti, CPA, MST Principal x 172 lnitti@wgcpas.om 1200 Tices Lane East Brunswick, NJ Wilkin & Guttenplan, P.C. Certified Public Accountants and Consultants 2032 Washington Valley Road Martinsville, NJ info@wgcpas.com Fifth Avenue, 17 th Floor New York, NY