While congressmen and women are out campaigning, congressional staff continue to work in the area of tax reform. As part of Accruit’s continued advocacy efforts on behalf of our real estate and personal property LKE clients and as co-chair of the Federation of Exchange Accommodators Government Affairs Committee, I’ve made six trips to Capitol Hill this year to meet with congressional staff, specifically targeting members of the House Ways & Means Committee and Senate Finance Committee, both of which determine U.S. tax policy.
House Ways & Means Draft Blueprint for Tax Reform
Earlier this year, House Ways & Means Chairman Kevin Brady, (R-TX) introduced the draft blueprint for comments and, learning from the experiences of past Chairman Dave Camp, is soliciting input on the blueprint from members of Congress, the business community, and other interested groups prior to voting out of committee. I’d like to highlight several points in the draft House Blueprint that could impact your business:
100% Immediate Expensing
Accelerating write-offs of capital assets is not a new expansion method and is still very popular. The idea dates back to the 1980s, and more recently we have seen bonus depreciation as a widely accepted form of this. But there are areas that the blueprint does not yet specify.
Eligibility for new and used assets: Though the House Ways & Means Committee is currently silent, comments from senior staff indicate a preference to include all assets, new and used, except land.. Excluding land may cause complications when allocating cost between land and buildings. Also, excluding land could prove problematic when it comes to maintaining a reasonable debt-to-equity ratio when funding projects up front. There are also indications of further exclusions for certain classes of assets, but details are still unavailable.
No interest deductibility: 100% immediate expensing is costly, so the funds for the blueprint would come partially come from eliminating interest deductions on debt. For our clients whose business model requires a higher debt-to-equity ratio, such a measure would make supporting growth initiatives or even maintaining current operations difficult.
Potential elimination of 1031 like-kind exchanges: Ways & Means senior staff indicated that while the elimination of like-kind exchanges is not currently drafted, it is still up for consideration as offset to cover the plan. During our meetings, we made very strong points as to why 1031 like-kind exchanges need to remain intact, should this bill move forward.
- Not all companies would choose 100% expensing. Depending on a company’s tax situations, immediate write-offs for tax purposes may not provide the flexibility needed to achieve company goals.
- Not all states may recognize 100% expensing for state tax purposes. Like-kind exchanges must be the vehicle to defer gain recognition at the state level.
- Not all assets may fall into 100% expensing categories. Absent 1031s, per the independent studies regarding repeal of 1031s, a contraction may occur in GDP due to the lock-in effect if assets’ sales trigger gains and there is no means of deferral.
- If land is not eligible for immediate expensing, then 1031s must remain the vehicle to defer gain recognition and encourage subsequent investment.
Senator Wyden’s Pooling Proposal
The pooling proposal from minority leader of the Senate Finance Committee, Senator Ron Wyden (D-OR), is another draft proposal worthy of continual monitoring. Election pundits suggest we may see a flip in the Senate from Republican to Democrat, placing Senator Wyden as chairman of the committee.
There are some new ideas for U.S. tax code in Wyden’s draft, the basis of which has its roots in Canadian tax policy. Wyden’s plan attempts to simplify depreciation calculations by pooling like assets in large groups (though FEA coalition members indicate the need to continue track assets on an individual basis negating most, if not all, of the simplification message).
Unlike past Senate proposals, Wyden does not eliminate 1031s. In fact, he continues to be a big supporter of the ability to defer gain recognition to encourage reinvestment. As we continue our dialog with committee members, applauding the retention of 1031s, we want to better understand how a new pooling regime provides the much-touted simplification while protecting the integrity and spirit of 1031 exchanges.
Avoid Unintended Consequences
Accruit continues to invest in advocacy efforts, hoping to connect the dots when tax reform bills are introduced so that you, our clients, will be informed on the details and not rely solely on the headlines. While in DC we constantly state our goal of avoiding unintended consequences. Members of Congress who introduce ideas that not only disrupt your business, but ours as well, need to understand the real implication of bills that may score well into a ten-year window. Though in the short term they appear to drive growth, they may, in the long term, impede business and dampen the economy.
Congressional Member Offices Visited in August
- Barbara Angus – House Ways and Means Committee
- Aruna Kalyanam and Alan Lee, House Ways and Means Committee (Minority)
- Rep. Kenny Marchant (R-TX-24)
- Rep. George Holding (R-NC-13)
- Rep. Jason Smith (R-MO-8)
- Rep. Peter Roskam (R-IL-6)
- Senator Chuck Schumer (D-NY)
- Rep. Pat Tiberi (R-OH-12)
- Rep. Jim Renacci (R-OH-16)
- Rep. Pat Meehan (R-PA-7)
- Senator Bob Menendez (D-NJ)
- Rep. Tom Reed (R-NY-23)
- Rep. Adrian Smith (R-NE-3)