Treasury Issues Regulations on New Pass-Through Business Income Deduction
The Internal Revenue Service (IRS) and the Department of the Treasury on August 8 released guidance on the new pass-through deduction enacted in last year's tax overhaul bill.
"The pass-through deduction is an important tax cut for small and mid-size businesses, reducing their effective tax rates to their lowest levels since the 1930s," said Treasury Secretary Steven Mnuchin, above. "Pass-through businesses play a critical role in our economy. This 20-percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans."
- The Tax Cuts and Jobs Act signed by President Trump in December included a new 20 percent pass-through deduction (section 199A) that can lower the top tax rate on qualifying pass-through business income to 29.6 percent. Such income was previously taxed at a top rate of 39.6 percent.
- According to Treasury's press release, the guidance is intended to:
- "Ensure that all small business income below $315,000 for married couples filing jointly (and $157,000 for single filers) is eligible for the deduction";
- "Provide clarity and flexibility for filers over those income thresholds by:
• Including 'aggregation rules' for filers with pass-through income from multiple sources;...
• Issuing guidance relating to specified service, trade or business (SSTB) income above the thresholds, which may be subject to limitation for the purposes of claiming the deduction; and...
• Allowing a de minimis exception to avoid unnecessary compliance costs for businesses earning only a small percentage of SSTB income"; and
- "Establish anti-abuse safeguards to prevent improper tax avoidance schemes, such as relabeling employees as independent contractors."
- "The pass-through deduction is an important tax cut for small and mid-size businesses, reducing their effective tax rates to their lowest levels since the 1930s," said Treasury Secretary Steven Mnuchin. "Pass-through businesses play a critical role in our economy. This 20-percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans."
- "The proposed pass-through regulations are a critical step forward in the implementation of tax reform provisions affecting real estate investment, jobs, and economic activity," said Jeffrey DeBoer, Real Estate Roundtable President and CEO. "A regulatory framework for the pass-through deduction is necessary to give taxpayers the certainty they need to move forward with new job-creating real estate projects that strengthen and enhance communities."
- The proposed regulations address several issues affecting real estate, such as the ability to aggregate income from multiple real estate partnerships. Some areas may need further development, such as the rules related to like-kind exchanges.
- In January, The Roundtable wrote to Treasury Secretary Mnuchin offering several suggestions designed to maximize the economic impact of the pass-through deduction and avoid unnecessary disruptions to business activity. [Roundtable Letter, Jan. 18].
The 184-page proposed regulation on the deduction will be formally published in a future edition of the Federal Register. Stakeholders and other interested parties will then have 45 days to submit public comments, followed by a public hearing on the proposed regulation on October 16.
Roundtable Q3 Survey: Commercial Real Estate Executives Report Balanced and Strong Current Market Conditions, Concern for the Future
The Real Estate Roundtable’s latest quarterly Economic Sentiment Index reported commercial real estate industry executives continue to see balanced and stable market conditions for Q3, despite growing concerns that the market may be at peak pricing and could be nearing the end of its current cycle.
The Roundtable’s Q3 2018 Economic Sentiment Index registered at 52 — a one point increase from the last quarter. However, this quarter’s Future-Conditions Index of 49 is seven points lower than the Current-Conditions index of 56.
- “As we move into the second half of the year, we continue to see robust markets, with debt and equity available, and asset values strong. The commercial real estate industry remains confident for the remainder of 2018,” said Roundtable CEO and President Jeffrey DeBoer. “The positive snapshot of current commercial real estate markets reflects a general absorption of recent interest rate increases, coupled with overall economic stimulation from tax reform.”
- The Roundtable’s Q3 2018 Sentiment Index registered at 52 — a one point increase from the last quarter. [The Overall Index is scored on a scale of 1 to 100 by averaging Current and Future Indices; any score over 50 is viewed as positive.] This quarter’s Current-Conditions Index of 56 increased four points from the previous quarter, and rose 5 points compared to the Q3 2017 score of 51. However, this quarter’s Future-Conditions Index of 49 is seven points lower than the Current-Conditions index of 56.
The report’s Topline Findings include:
Roundtable CEO and President Jeffrey DeBoer noted, “Looking to future market conditions, industry executives are noting uncertainties regarding the November midterm elections and growing interest rate and international trade concerns. Policymakers must stay focused on developing pro-growth policies that continue to benefit the overall economy and spur job growth.”
- The Q3 index came in at 52, a one point increase from Q2. Responders view the market as balanced in terms of property supply and demand. Some responders pointed to pockets where the balance is slipping, but felt the general market conditions are positive and will continue to be so, barring an unexpected event.
- Most responders feel market conditions are stable, but there is growing sentiment suggesting the industry is nearing the end of its current cycle. This sentiment is reflected in the seven point spread between current and future real estate conditions shown in Exhibit 1.
- Most responders suggested asset values have reached peak pricing for many property types, and certainly in major gateway cities. Despite potential peak pricing, industrial properties continue to attract a large volume of investors.
- Debt and equity capital sources remain plentiful, but responders expressed concerns about the amount of debt available and the ramifications of the mounting time pressure some lenders have to invest their capital.
DeBoer added, “Looking to future market conditions, industry executives are noting uncertainties regarding the November midterm elections and growing interest rate and international trade concerns. Policymakers must stay focused on developing pro-growth
policies that continue to benefit the overall economy and spur job growth.”
Data for the Q3 survey was gathered in July by Chicago-based FPL Associates on The Roundtable’s behalf. The next Sentiment Survey covering Q4 2018 will be released in November.