Blog Posts Tagged With Interest Deductibility

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Comparison of the Final House and Senate Bills

While the last-minute changes made to the Senate Bill brought the House and Senate Bills closer together, a number of important differences remain.  The House and Senate will attempt to hammer out these differences over the next few weeks in conference committee. In the meantime, we have prepared a comparison of the more salient provisions of the two bills.

You can view the full text of the bills on our House Bill Navigator and Senate Bill Navigator. We also ran a comparison of the final Senate Bill against the initial legislative text, which is available here.
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Comparing the House and Senate Tax Proposals Affecting Private Equity

The House and Senate versions of the Tax Cuts and Jobs Act would each have a significant impact on private equity firms, investors and portfolio companies.

We have prepared a presentation that summarizes many of the relevant provisions as they currently stand in each version and highlights their differing impact on private equity. This follows our post from last week highlighting the provisions in the House tax bill affecting private equity.
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More on the Senate Mark’s Corporate Provisions

The Senate Finance Committee has released a summary of its proposed tax legislation (what we refer to as the Senate Mark), though without any legislative text. Following the House, the Senate Mark would lower tax rates and reduce or eliminate deductions and credits for corporations, but in several respects it takes an approach that differs from the House bill (which you can read about here). Here are some of the highlights:

Rate Reduction.  Like the House bill, the Senate Mark would eliminate the corporate alternative minimum tax and replace today’s graduated corporate tax rates, which include a top marginal rate of 35%, with a flat rate of 20%.
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More on the Senate Mark’s Real Estate-Related Proposals

The text of the Senate Finance Committee’s proposed tax reform bill has not yet been released, but the Senate Finance Committee Chairman’s Mark released in summary form (“Senate Mark”) suggests that it will differ from the House bill as reported to the House floor on November 9 in several material respects. Below, we highlight several of the proposals mentioned in the Joint Committee’s summary that are of interest to the real estate industry.

17.4% Deduction for Certain Pass-Through Income (including REIT dividends).  Subject to the wage limitation mentioned below, the Senate Mark generally allows an individual to deduct 17.4% of its “domestic qualified business income” from a partnership, S corporation, or sole proprietorship.
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Senate Mark at a Glance

The Senate Finance Committee Chairman’s Mark (Senate Mark) released last night diverges sharply in many respects from the House Bill.  Although in summary form, the Senate Mark describes a comprehensive tax reform proposal that will take some time to analyze. In the meantime, the table below summarizes key features of the Senate Mark, together with a comparison to the final House Bill.

We have also released an initial version of our Senate Bill Navigator, a hyperlinked version of the Senate Mark built to ease your navigation of its text, which you can find here.

Corporates.  As expected, the Senate Mark calls for a permanent reduction in the corporate tax rate to 20%, with implementation delayed until 2019.
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Brady’s Second Amendment at a Glance

Chairman Brady released another manager’s amendment to the House Bill this afternoon. This amendment was promptly approved by the House Ways and Means Committee 24-16 and included in the House Bill reported to the floor.

We have incorporated this amendment into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here. Click here for a comparison that shows the entirety of the bill’s text. Both comparisons are against the bill as amended on November 6th. We will follow up in the morning with an updated Tax Bill Navigator, reflecting the final bill as reported to the House floor.
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The House Tax Bill Provisions Affecting Private Equity

The House tax bill contains several provisions that could significantly affect private equity sponsors, investors and portfolio companies. Below we have highlighted a number of these proposals, including discussions of:

Carried Interest. The House bill generally would limit the favorable taxation of carried interest to investments that have a holding period of more than three years, and treat carried interest attributable to gains on investments held for three years or less as short-term capital gain (taxed at the rates applicable to ordinary income).
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More on Section 163(n): Additional Limitations on Interest Deductions

The House tax bill would add a new Section 163(n) which limits interest deductions of a domestic corporation (or a U.S. affiliated group that files a consolidated return) that is a member of an “international financial reporting group” (“IFRG”).

  • An IFRG is defined as a group which includes (i) (x) at least one foreign corporation engaged in a U.S. trade or business or (y) at least one domestic corporation and at least one foreign corporation, (ii) prepares consolidated financial statements and (iii) reports gross receipts annually over the past 3 years of at least $100 million.

The Limitation.  In essence, a domestic corporation that is a member of an IFRG would be permitted to deduct interest expense only up to an amount equal to the member’s interest income plus 110% of its allocable share of IFRG net interest expense, which is its pro rata share of the net interest expense of the IFRG allocated based on EBITDA generated by each member.
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Proposed Section 163(j) in the Partnership Context

The bill generally limits the amount allowed as a deduction for business interest to the sum of the taxpayer’s business interest income and 30% of the taxpayer’s adjusted taxable income for the taxable year. In general, a taxpayer’s “adjusted taxable income” is its taxable income, determined by excluding (i) items not attributable to a trade or business, (ii) business interest income and business interest expenses, (iii) any net operating loss deduction, and (iv) deductions for depreciation, amortization or depletion.

In the case of partnerships, the limitation on the deductibility of business interest applies at the partnership level. That means that the deductibility of a partner’s share of a partnership’s business interest is determined by reference to the partnership’s adjusted taxable income, without regard to the amount of the partners’ adjusted taxable income.
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More on the House Bill’s Excise Tax

The House tax bill released last week includes two measures that limit the ability of multinational groups to reduce their U.S. taxes. First, the bill would provide for a foreign minimum tax in the form of a high-profit foreign subsidiaries tax. We discussed that change in detail here.

Second, the bill would impose a 20% excise tax on certain payments made by a U.S. corporation to its non-U.S. corporate affiliates. That change is the subject of this post.

The excise tax is designed to eliminate the tax benefit of the deduction for a broad category of payments by a U.S.
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Weekly Roundup: Key Posts and What’s on Deck This Week

Last week was a busy week at Tax Reform And Transition. House Republicans released text of a tax reform bill on Thursday (view the full bill through our Tax Bill Navigator), followed by an official Chairman’s Mark on Friday. Late Friday night, the Joint Committee on Taxation released an official summary of the Chairman’s Mark, together with their assessment of the revenue effects and distributional effects of the Chairman’s Mark.

You can read our grid summarizing the key provisions of the bill here. Here’s a round up of the tax reform topics covered in our more detailed posts so far:

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More on The House Bill’s Real Estate-Related Provisions

The tax reform bill that House Republicans released last week contains a number of provisions that could impact the  real estate industry. We highlight a few of the most significant proposals below:

Business Income of Individuals.  As described in more detail here, the bill proposes a new regime that effectively introduces a maximum 25% tax rate on 100% of passive business income and generally, unless an election is made or the business is a service business, on 30% of active business income.

  • The real estate industry will benefit from the fact that, under the new rules, most rental activity will produce passive business income.

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More on the House Tax Bill’s Corporate Tax Changes

There is broad political support for the proposition that the U.S. corporate tax system makes U.S. companies less competitive. The House tax bill responds to this challenge by proposing to lower tax rates and reduce or eliminate deductions and credits. Here are the noteworthy items:

Rate Reduction.  The bill would replace today’s graduated corporate tax rate, which includes a top marginal rate of 35%, with a flat rate of 20%. Personal service corporations would be subject to a 25% rate. The changes would take effect next year and would be permanent. The bill would eliminate the corporate alternative minimum tax.
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The House Tax Bill at a Glance

The draft legislative text released today comes in at over 400 pages, and will take some time to analyze.  In the meantime, the table below summarizes key features of the bill.  In addition, a section-by-section summary prepared by the House Ways and Means Committee is available here.  We have also released an updated version of our Tax Bill Navigator, a hyperlinked version of the bill built to ease your navigation of its text, which you can find here.

As expected, the bill calls for an immediate and permanent reduction in the corporate tax rate to 20%.  The bill significantly limits the deductibility of interest expense for certain businesses, introducing a cap equal to 30% of earnings before taxes, depreciation and amortization, and limits other deductions but provides for immediate expensing of depreciable assets on a temporary basis.  
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The Big Six Framework “Arrives”

The Big Six tax reform framework has arrived, sort of. The Big Six officially released “The Unified Framework for Fixing our Broken Tax Code” this morning, in a format (and in many ways content) that resembles the House Republican blueprint from 2016. Although more detailed than the proposal put forward by the Trump administration in April, the Framework leaves a number of key decisions up to the House and Senate tax writing committees. Without further ado, here is a summary of what the Framework contains:

A few initial observations:

Not a Lot of Detail.  While the framework sets forth a rough outline of a tax reform bill, the level of detail contained in the framework and the number of instances where the framework specifically leaves discretion to the tax writing committees indicates that the plan is very fluid at this stage.
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Prospects for Tax Reform in 2017?

House Speaker Paul Ryan (R-WI) addressed the National Association of Manufacturers on Tuesday in an effort to build support for tax reform, emphasizing the unique, and diminishing, window of opportunity that exists to enact permanent tax reform ahead of next year’s primaries and midterm elections. According to his press office, this speech marks the beginning of his “sales pitch” for tax reform in 2017. Speaker Ryan’s prepared remarks are available here. You can also watch his speech here (starting at 1:41:34).

Here are the key takeaways:

  • Republicans Are Aiming for End of 2017:  Speaker Ryan said that lawmakers would “begin to turn” their plan into legislation to put in front of Congress, and promised to “get this done in 2017.”

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DBCFT Still Not Dead (to Brady)

At a WSJ conference yesterday, House Ways and Means Committee Chairman Kevin Brady (R-TX) gave a few tantalizing hints as to the content of the much anticipated house tax reform bill. Most notably, Brady suggested that the bill would include a DBCFT that is phased in over a five-year transition period. This is intended to respond to a number of concerns, including the fear that currencies may not adjust immediately (click here for the Tax Foundation’s summary of the concerns alleviated by, and new concerns raised by, a five-year transition).

Brady also reaffirmed that certain industries (financial services, communications, insurance and digitally-focused businesses) would be subject to “special treatment” under the DBCFT.
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Reactions to the Trump Tax Plan

As noted in yesterday’s summary, the basic outline of the Trump Administration’s tax plan is largely similar to the Trump campaign proposals, with fewer details and with one notable shift toward the House Blueprint’s approach – the move toward territoriality. The table below shows how this latest plan compares to the House Blueprint and the Trump 2016 campaign plan.

In the press conference to announce the “broad-strokes” plan, both Treasury Secretary Mnuchin and National Economic Council Director Cohn said that they were in agreement with members of Congress over the four driving goals of tax reform – grow the economy and create millions of jobs, simplify the tax code, provide tax relief to American families, especially middle-income families and lower the business tax rate from one of the highest in the world to one of the lowest.
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Tax Reform and Revenue Raisers

One of the biggest challenges facing lawmakers in the current tax reform process is finding a way to reduce headline tax rates in a revenue neutral way. Some revenue raisers (like eliminating itemized deductions) would raise significant revenue and simplify the tax code. Other revenue raisers come at the cost of increased complexity, at least in the short term (e.g., implementing a federal VAT or a new carbon tax). Closer inspection of ideas on the table reveals that politically popular reforms are not necessarily the largest revenue raisers. For example, there seems to be bipartisan support for taxing carried interest as ordinary income (more on that here), a relatively small revenue raiser.
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Sanders/Schatz Tax Reform Bill: A Recent Data Point from the Democrats

While House Republicans could use the budget reconciliation process to pass tax reform without the need for Democratic support, leaders in the Senate have indicated a desire for bipartisan reform. White House press secretary Sean Spicer’s statement earlier this week on the tax reform process also suggests that input from the Democrats may be relevant.

With that in mind, we thought it would be useful to highlight a bill introduced in the Senate by Senators Bernie Sanders (I-VT) and Brian Schatz (D-HI) – the “Corporate Tax Dodging Prevention Act of 2017.” A companion bill was introduced in the House of Representatives by Representative Jan Schakowsky (D-IL).
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Existing “Tax Calls” and Corporate Tax Reform

Last week, we wrote about whether, in anticipation of tax reform, issuers would begin to include “tax calls” in newly-issued debt, allowing the issuer to redeem the debt (at par or a nominal premium to par plus accrued interest) if legislation limits the ability to deduct interest on the debt. Read last week’s post here. In this follow-on post, we give more color on “typical” tax call language, with a few additional observations as to the effect that tax reform may have on existing tax calls.

Tax Calls Related to Interest Deductibility.  As we noted last week, certain types of outstanding debt, such as “hybrid” debt and long-dated debt (including junior subordinated debt), already typically include tax calls.
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Drafting “Tax Calls” In Anticipation of Tax Reform

Elimination (in whole or in part) of the deduction for net interest expense is a common element of recent tax reform proposals.  Many observers predict that, if we do get corporate tax reform, this feature will be part of the package in one form or another.  As a result, debt issuers and bankers have been considering the pros and cons of including a “tax call” in newly-issued debt, in the form of a right on the part of the issuer to redeem the debt at par plus accrued interest if the law changes such that the issuer cannot claim a deduction for interest paid on the debt.
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