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Tax law changes require patience and flexibility from investment management and real estate sectors
Not surprisingly, tax law changes were a hot topic at our 10th Annual Financial Services Global Tax Planning Conference held in New York in June. Read the highlights from our tax reform panel discussion with Deloitte Tax LLP (“Deloitte Tax”) practice leaders from across investment management and real estate.
August 23, 2018
A blog post by Julia Cloud, partner and co-leader, US Investment Management Tax practice, Deloitte Tax LLP
Deloitte Tax hosted its 10th Annual Financial Services Global Tax Planning Conference in mid-June. Tax reform permeated much of the two-day conference. Deloitte Tax LLP practice leaders from across investment management and real estate gathered to discuss the far-reaching impact of tax reform and the questions that remain. The following is a recap of their collective insights.
The uncertainty around how to comply with the new law will likely continue
The combination of an incredibly fast timeline for drafting, amending, and passing the 2017 Tax Act (the Act)1 and the stipulations of the Byrd Rule resulted in final tax reform legislation that requires considerable clarification and correction from Treasury, the Internal Revenue Service, and Congress. With no apparent bi-partisan support for a technical corrections bill in the near term—despite the many issues that need to be addressed—it’s not clear if or how these might be tackled legislatively. There is some chance that technical corrections could be addressed in the lame duck session of Congress that will follow mid-term elections, but they could easily be delayed into next year. Progress is slow on the regulatory guidance front as well, and may well slow down even more now that certain tax guidance will be subject to review by the Office of Management and Budget. The panel noted that taxpayers might be waiting until late summer, or even until the end of the year, for guidance on key issues like 163(j), the Base Erosion and Anti-Abuse Tax (BEAT), and the Global Intangible Low-Taxed Income (GILTI) provision.
1 An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.
Companies can still prepare and plan in the meantime
The uncertainty of the new tax environment makes it difficult to help clients take a position and decide on next steps. However, the panelists agreed that in some instances, there are general preparations and even a few actions that companies should consider.
Hedge fund companies may want to consider using their final 2017 K1, assuming the same fact pattern, and then pretending it’s 2018. This approach can help them to get a sense of what could happen under the new law as it is written and what that reporting framework might look like. At the firm management level, domicile is a key area not just of analysis, but of action, given the new state and local tax provisions.
Deloitte's Private Equity Tax practice is emphasizing the importance of prioritizing tax reform analysis and planning with companies—many of whom have modest-sized tax departments and little bandwidth. A handful of provisions required immediate action because of the impact on portfolio companies—including the transition tax, carried interest, 163(j), and 1446 withholding for a sale of partnership interest. However, now that firms may have a little breathing room, they can start planning for the impact of provisions such as GILTI and exploring the merits of an entity change (from pass-through to C corp).
It can be challenging for real estate companies to feel comfortable taking tax positions in the current environment because new provisions are likely to impact deal structures, so clients exploring scenarios in this area should be prepared to be flexible when guidance is released. Section 163(j) and its potential impact on raising capital is another area where real estate companies are waiting and watching before taking a position. There is much conversation and exploration around exemption options. Some have sold assets, but most want to wait for the optimal market conditions. However, it’s hard to know if or when the right time will come.
In private wealth circles, the 199A pass-through deduction is causing some confusion and concern. It's complicated and difficult to know if you qualify or not. Since many family offices are currently structured as pass-throughs, they might want to consider the pros and cons and model the impact of a potential conversion to a C corp. The increased exclusion for gifts may be a potential opportunity for clients to plan for the next year or two—review assets, understand which ones will appreciate, and evaluate the best use of the exclusion.
Regulated investment companies (RICs) are waiting for more guidance and technical corrections to conduct tax planning. A key concern from this group is the accounting method provision for original issue discount (OID) and market discount as it relates to tax-exempt funds. Other issues they are watching: The applicability of interest expense limitations and business income with respect to the ordinary income distributions on real estate investment trust (REITs).
Moving forward is possible
While the continued uncertainty around several key provisions can be challenging, our panel discussion demonstrated that it is possible to do some focused planning and preparation. Companies may find value in using the information they have today to model and explore the potential impact of key provisions as they are currently written. They also may need to embrace a few key virtues in light of the most significant tax law changes in a generation: Patience and flexibility.
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