Analyzing the potential impacts of proposed tax reform

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There is a large consensus that there will be tax reform, but not a strong consensus on what that tax reform will be.

David Tribbett, CPA
Tax senior, Anton Collins Mitchell LLP, Denver

Tax reform was a hot topic long before President Trump was elected. Both candidates’ tax proposals were something of constant debate. Now that President Trump is half a year into his presidency, there is still a strong debate on where we will go with tax reform. There is a large consensus that there will be tax reform, but not a strong consensus on what that tax reform will be. The following are a few of the proposed changes that would affect millions of Americans if implemented:

  • Reduce the number of tax brackets down to three (10, 15 and 25 percent).
  • Reduce the corporate tax rate.
  • Increase the standard deduction.
  • Repeal the 3.8 percent net investment income tax.
  • 100 percent deduction of real property.
  • Repeal of section 1031 like-kind exchanges.

There is widespread debate on the specifics of when the tax reform will occur and if these items are the ones that will be adjusted. I feel that it is important to explore the possible impact on taxpayers of these proposed changes.

Reduce the number of tax brackets to three. We don’t know what the impact of reducing the number of tax brackets will have on taxpayers since they have yet to outline the income amounts that would fall into each tax bracket. One can assume that the proposed brackets of 10, 25 and 35 percent will lower the overall tax rate for many taxpayers, but could increase the rate for others.

Reduce the corporate tax rate. Many believe the proposal to reduce the corporate tax rate will have a positive impact on the economy and encourage businesses to stay in the U.S. and even attract foreign companies to move operations. This could lead to potential tax-planning opportunities for taxpayers. The proposed 15 percent corporate rate, which will be lower than the highest individual tax bracket, could incentivize taxpayers to operate their businesses through C corporations where currently a flow-through structure would be more advantageous.

Increase the standard deduction. The increase of the standard deduction is one of the proposed changes that many people are discussing. The proposal is to double the standard deduction, which would lower taxes for many taxpayers without the need for itemizing. The proposal would not get rid of the charitable contribution deduction or the mortgage interest deduction for those that are itemizing, but could make both deductions irrelevant for most taxpayers who typically itemize, as the deduction may now be lower than the new standard deduction.

In other words, the proposal would eliminate the tax benefit of owning a home. The potential impact this could have on future homebuyers and the real estate market is enormous. Individuals who have the cash to purchase with all equity and currently are using debt because interest rates are low may reconsider if they are losing the tax benefit of the interest deduction.

Repeal the 3.8 percent net investment income tax. The net investment income tax is a 3.8 percent tax on the portion of your adjusted gross income over certain thresholds. Since the implementation of this tax, it has been one of the most contentious items related to tax law for the Republican party. It is a tax that is consistently mentioned as something that needs to be repealed.

100 percent deduction of real property. One of the more interesting proposals is the immediate expensing of real property. It is a proposal that could have huge economic and tax implications should it pass. However, making this election would eliminate the ability for companies to take the interest expense deduction. Not only could this be a huge planning opportunity for many taxpayers at year end to help eliminate paying tax, but also would have enormous implications on the real estate industry.

For example, would there be a shift in thinking to be more equity driven as opposed to debt driven? Does it decrease the value of debt? It may or may not have implications on the way people think of debt, but it is an interesting thought.

Repeal of section 1031 like-kind exchanges. The repeal of 1031 exchanges, otherwise known as like-kind exchanges, has been on the chopping block for decades. Section 1031 of the Internal Revenue Code allows taxpayers to defer the gain on the sale of property when the proceeds are reinvested into similar property. The repeal of this code section alone could increase tax revenue by billions, but it would have a dramatic impact on the real estate industry. It also could impact the desire to sell a property and to trade into more expensive properties if it would force a current taxable gain. However, the possibility of this happening, especially under President Trump, who has benefited from numerous 1031 exchanges, is still, in my opinion, very unlikely.

The uncertainty around tax reform and, in particular, which items of tax reform are likely to be passed, has made it very difficult to predict what is going to happen and what affect it will have on taxpayers. Once proposals are finalized we will have a better understanding of the opportunities these changes present, but currently it seems to be a moving target. One thing that seems extremely likely is that 2017 will be a year of significant tax reform, or at least talk of it coming in the near future.



Featured in CREJ’s July 19-Aug. 1, 2017, issue

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