On Thursday, March 8, 2018 nearly 100 CAA members gathered at The Wells Barn at Franklin Park for the first CAA General Membership Meeting of the year anxious to hear how tax reform and property valuations would impact their business.
CAA Executive Director Laura Swanson welcomed everyone to the meeting and, as tradition, recognized all of the CAA Past President’s and Hall of Fame members in attendance. She then had the honor of presenting the awards from the CAA Bowling for Charity Luncheon to Alan Carr with Commercial One Realty with the highest overall score and the team of Carr, David Holzer, Alex Holzer and Doug Baker the highest team score.
Swanson turned the podium over to CAA Associate Council Chair and Expo Workgroup Chair Mike Lange who invited everyone at attend this year’s Expo at Cardinal Hall on April 18. Lange outlined a few of the exciting opportunities and education offerings that attendees could take advantage of throughout the day.
Finally, David Holzer, CAA President welcomed the new members in attendance before introducing the afternoon’s panel of speakers, Chadd Weisert of The Tidwell Group, Mark Snider from Porter Wright and Steven Gladman, CAA Policy Analyst to discuss the hot topic of the year so far; taxes.
Weisert began the presentation with an overview of the two new laws taking effect; the first being the tax reform bill and the second, a law passed in 2015 with a January 1, 2018 effective date, regarding the IRS audit structure for partnerships. Beginning with the tax reform bill, Weisert stated that the first thing to note is that the interest deduction is dramatically limited from what it has been in the past. But, there were positive changes with the depreciation rules.
Speaking first to the partnership audit rules, Weiser outlined that IRS has updated the ways partnerships will be audited changing a law from 1982. Prior to the changes, the percentage rates for partnerships being audited was .08% whereas corporations are being audited at 27.1%.
“The IRS knows they’re not auditing partnerships like they want to and the IRS has said they view this new rule as a revenue raiser,” Weiser said. “Unfortunately, I think it’s their way of saying we’re going to audit partnerships more than we have in the past.”
Weisert said he expects it will be a couple years before they see audits under the new rules, however, he has advised his clients to expect the IRS to be coming. While it may delayed for clarity, the IRS is not going away.
Snider then addressed the partnership audit rules from a legal standpoint stating that a lot of the regulations are still in temporary form, but, the reality is, there will be new rules going forward that everyone will have to live with.
“As a lawyer, what I think about is what we need to do as far as our agreements,” Snider stated. “Almost any partnership is going to have an operating agreement or limited partnership agreement that probably has provision talking about the TEFRA rules. If you look to the end there’s a section that talks about tax matters partner. And, tax matters partner was the person previously under TEFRA who managed the audit process. That person had some power, but, not nearly as much power as the replacement. The replacement person is called the partnership representative. It’s a change in nomenclature, but, it’s more than that.”
Snider continued by saying under the new audit rules the partnership representative acts the same way the CFO would act if a C Corporation were audited. If the IRS is auditing a partnership, and the partnership representative agrees to and adjustment that is the final determination, the partnership will owe the additional tax.
“Most agreements that pre-date 2015 or 2016 are going to have the wrong nomenclature,” Snider said. “They’re not going to address the new law. There’s a sort of chaos out there trying to figure out who the new partnership representative is going to be.”
When partnerships file tax returns the preparer is going to have to state a partnership representative on the return. The preparer may just default to one person and may not contact the partners. Snider suggests all documents be reviewed and agreements be reworded if necessary. Snider suggested including wording that states that the partnership representative cannot sign off without approval of the other partners.
Depending on the way the partnership is structured there may be ways to opt up, certain type of small partnerships, or partnerships with partnerships may be able to opt out, among others. Also under the new regime the partnership itself may owe a tax and there remains some question as to whether or not that tax can be pushed out to the partners. Finally, Snider recommended provisions be added to agreements that require exiting partners to have to contribute money back to the partnership.
“I don’t know how the IRS pick partnership to audit,” Weisert chimed in. “But, one thing I do know, if you ignore communications from the IRS, they’re probably coming. “In my practice, in the last five or six audits the root cause was that notices from the IRS were ignored. If you take nothing else away, respond to the IRS correspondence. Send it to your CPA or attorney, but, respond.”
Moving from the partnership audit to the now effective tax reform bill Weisert spoke to the re-computation of taxable income and the deduction of interest expense. Interest expense, debt, is a big part of the project so it has an impact.
The provision is not applied to ‘small taxpayers,’ Weisert noted. However, the catch would be if you have an operating partnership and a bank is the partner. If there is a large taxpayer as part of the partnership one is still subject to the provisions. The second way out is to elect to be characterized as a real property trader business. But, the downside would impact depreciation extended the timeframe from 27.5 to 30 years. The next provision is where the IRS is giving back. They have added the bonus back into depreciation, 100% will be depreciated from the year the asset it is placed in service after September 27, 2017.
The next point of discussion became pass through partnerships. A new code section has been created setting forth the rules.
“It’s a very poorly worded statute, and there are no regulations yet,” Snider said. “There is probably a thousand different comments and lawyers who have written articles. And, there are differences of interpretation and differences of opinion and in those articles nobody is exactly sure how some of the provisions will shake out in the regulations. There are a couple things that are clearly errors that, hopefully, Congress will fix. This quickly gets deep in the weeds.”
Saying it’s impossible to understand it currently, Snider focused on who may benefit from the deduction. The C Corporation tax rate received a huge deduction opening the door to a shift without compensation for pass through entities, not particularly real estate, however.
Many pass through businesses are law firms, doctors, medical providers and it was not Congress’ intention to provide those entities a deduction. Up to a certain point, they are all treated the same, the rules are tested at the individual level, even for those as part of the exception. Over the threshold the deduction applies to only qualified entities which includes real estate. If a company is set up as an LLC, a partnership or an S Corporation it will likely qualify for the deduction.
Finally, Snider spoke to the property tax valuations noting that the last date to get an appeal to the Board of Revision is April 2. He noted that if you have not had a recent sale, one needs an appraisal with the date of the tax assessment and will need to have a lawyer involved to file the complaint.
Weisert and Snider concluded by touching on a few miscellaneous tax items of note that may be relevant to the industry and were kind enough to stay to answer personal questions following the presentation.
Swanson returned to the podium and thanked the attendees reiterating her hopes to see them on April 18 at the CAA Expo.