WASHINGTON, DC–The Tax Cut and Jobs Act is the biggest change to the US tax code in 30 years. There is still much about it that needs clarification. Even the provisions that are perfectly clear, such as the tax rates, lead to further questions, at least in the commercial real estate community.
For instance, many real estate firms are be grappling with the question of whether to structure as a C corp. to take advantage of the new 21% corporate tax rate or to continue on as a pass-through entity.
The lower rate notwithstanding, this can be a surprisingly complex decision to make, says Montgomery McCracken Senior Tax law partner Gary M. Edelson. Here's one reason why: there is still the accumulated earnings tax and the personal holding company tax and therefore, a C corp. can't be used to to hold a large portfolio of stock and bonds. “Business entities where they need every nickel they can get their hands on and have no intention of distributing anything to the equity owners for as long as they can, would do well to opt to be a C corp.,” Edelson says.
And there are other considerations as well.
For instance, the bonus depreciation rule now also applies to used equipment as well as new equipment as long as it's bought from an unrelated person. “Many transactions that might be stock purchases may be recast as asset purchases because the buyer is able to immediately deduct a very substantial portion of the purchase price if that business happens to use a lot of equipment,” Edelson says.
He suggests that you want to be a pass-through entity, he continues, because if you're a C corp. and you sell assets and liquidate, you've got a double tax. Whereas if you're a pass-through, you've got a single-level tax. All of this makes that decision of whether to opt for C corp. or pass-through entity that much more difficult, Edelson says, because to make the best decision you have to know what is going to happen down the road.
Indeed, he says, anyone who makes the knee-jerk decision to change their structure to a C corp. is kidding themselves if they really believe they can think through all of the collateral implications. “My guess is it's going to be mid-year before people are able to fully think through all of the ramifications of making a choice of entity decision.”
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
