February 15, 2023
The Tax Cuts and Jobs Act was signed into law on December 22, 2017. This marked the first comprehensive tax law reform since 1986, and has had an impact on every American taxpayer and industry. The TCJA brings new opportunities, as well as some challenges, to the commercial real estate community. Most of the legislation became effective January 1, 2018, with two important exceptions.
Capstan Tax Strategies is at your service as we navigate these changes together. We’ve done a thorough review of the TCJA- Tax Cuts and Jobs Act and analyzed the legislation most likely to have a major impact on our clients and colleagues. (Click HERE if you’d like to read the Act in full).
Corporate Tax Rate
- The top corporate tax rate of 35% was reduced to 21%. Corporate AMT was eliminated.
Interest Deduction Limitation
- For years beginning 1/1/2018, companies are subject to a limitation on deductible interest expense. The deductible amount is capped at 30% of adjusted taxable income, after certain adjustments.
- Companies that are “real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business” may “elect-out” of this limitation. However, any company that elects-out of the interest limitation will be required to depreciate its real property using the Alternative Depreciation System (ADS).
For a company electing-out for tax years after 12/31/17, the ADS lives below are applicable:
- Residential real property assets are 30 years straight line.
- Nonresidential real property assets are 40 years straight line.
- Qualified Improvement Property are 20 years straight line for ADS.
- If a company does not elect-out of this limitation, they may continue to depreciate assets using the current MACRS class lives.
- There is one major exception to the above. If a firm’s three-year average annual gross receipts are $25M or less yearly, it is completely exempt from the deduction limitation and may continue to depreciate real assets utilizing MACRS class lives. (Aggregation rules may apply for related entities.)
We’ve done a thorough review of the TCJA- Tax Cuts and Jobs Act and analyzed the legislation most likely to have a major impact on our clients and colleagues.
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