How Are Corporations Responding to the Tax Cuts?

The Burnham-Moores Center for Real Estate in the University of San Diego School of Business hosted a breakfast yesterday to discuss the impacts the recent tax plan will have on corporations and individuals. The event, titled the Corporate and Individual Impacts of the Tax Cuts and Jobs Act of 2017 and How to React to It, included speakers Russell Broadway, tax account leader at EY; James Gergurich, tax principal at KPMG; and Cory Grant, founder and partner at Grant Hinkle and Jacobs Inc.

“This timely topic provided our attendees with insights into the impacts of the corporate and individual tax rate changes and how corporations and individuals must consider the implications of these tax ramifications on long-term investments, 1031 exchanges and long-term employee retention incentives,” Stath Karras, executive director for the Burnham-Moores Center for Real Estate, tells GlobeSt.com. “As with all of our events, our speakers are on the forefront of this topic and there was excellent dialogue between the panelists and our attendees at this event.”

According to a survey conducted for the event, taxes are among the chief concerns for business owners. The event opened with a review of the new tax plan for both corporations and individuals. For corporations, the tax plans includes a reduced rate of 21% and a deduction for dividends received from domestic companies. The alternative minimum tax was repealed for corporations; however, companies can use AMT credits to offset regular tax liability during the transition. Additionally, qualified pass-through business income has been limited to either 50% of wages or the combination of 25% of wages and 2.5% of deductible tax basis on qualifying property. Income from professional services does not qualify for QBI, but REIT dividends and income from some publicly traded partnerships is eligible for the deduction. Another big change was made to bonus depreciation, which has increased to 100% for qualifying property, not including buildings and land, with an elective transition rule that allows 50% expensing for the first tax year ending after September 27, 2017.

The biggest tax impacts for real estate companies specifically will come from changes to carried interest and 1031 exchanges. Long-term capital gains held for less than three years will now be re-classified as short-term capital gains, and partnership interest must be exchanged for services. The change to 1031 exchanges was nominal for real estate professionals. It will remain available only for real property, but it has been repealed for assets other than real property.

The speakers also reviewed a case study of how to preserve wealth for a family office with low basis real estate assets. The case study utilized the cash value of the policy as collateral and minimal outside collateral in the first several years, and the loan repayment will come from either a cash surrender value policy or from the sale of the real estate following the spouse’s death. Using this strategy, estate liquidity is preserved for modest out-of-pocket costs, the low basis real estate continues to pay dividends and the real estate can be sold on a step-up in cost basis following the death of the first spouse, and therefore no capital gains taxes are incurred. The structure also allows for focus on the growth of the family office.

The breakfast, which was held at the Alexandria at Torrey Pines, Illumina Theater, concluded with a question-and-answer session. The event was part of the BMC Lecture Series.