IRS Green-Lights Electronic Filing for Business Tax Returns
January 2004
Effective December 19, 2003, the Internal Revenue Service (IRS) eliminated regulatory impediments to the electronic filing of tax returns and other forms filed by corporations, partnerships and other businesses. This is in response to the 1998 Internal Revenue Service Restructuring and Reform Act (Public Law 105-206) which set a long-range goal for the IRS to have at least 80 percent of all Federal tax returns filed electronically by 2007. The IRS was required to establish a 10-year strategic plan to eliminate barriers to electronic filing.

The IRS identified a number of regulatory provisions that impeded businesses from filing electronically. The new regulations eliminate impediments for taxable years beginning after December 31, 2002 and generally affect taxpayers who must file any of the following forms:

• FORM 926, “Return by a U.S. Transferor of Property to a Foreign Corporation”,
• FORM 972, “Consent of Shareholder To Include Specific Amount in Gross Income”,
• FORM 973, “Corporation Claim for Deduction for Consent Dividends”,
• FORM 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)”,
• FORM 1120, “U.S. Corporation Income Tax Return”,
• FORM 1120S, “ U.S. Income Tax Return for an S Corporation”,
• FORM 1122, “Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return”,
• FORM 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”,
• FORM 5712-A, “Election and Verification of the Cost Sharing or Profit Split Method Under Section 936(h)(5)”, and
• FORM 8832, “Entity Classification Election.”

Treasury Issues Depreciation Guidance
January 2004
On December 30, 2003, the Treasury Department issued proposed, temporary, and final regulations to clarify which changes in depreciation are changes in method of accounting.

In recent years, uncertainty has existed regarding whether a change in the period of recovery of depreciable property was a change in method of accounting. The regulations provide that a change in the period of recovery specifically assigned by the Code, the regulations, or other published guidance is indeed a change in method of accounting. The regulations also provide, however, that a change in the useful life of depreciable property is not a change in method of accounting if the useful life of the property is not specifically assigned by the Code, the regulations, or other published guidance. In addition, the regulations provide that a change in depreciation method or convention is a change in method of accounting.

House Bill Would Reduce Depreciable Life of Tenant Leasehold Improvements
December 2003
The American Jobs Creation Act of 2003 (H.R.2896) includes an important provision that would reduce the depreciable life for tenant leasehold improvements from 39 to 15 years for property placed into service in 2004 and 2005.  The bill passed the House Ways & Means Committee, and House leadership would like to bring it up for a vote on the floor of the U.S. House of Representatives before they adjourn for the year.

IREM, the CCIM Institute and the REALTORS Commercial Alliance sent Calls to Action to their respective membership requesting contact with Members of Congress asking for their support of H.R. 2896. IREM has also sent a letter of support to the Ways and Means Chairman Bill Thomas who has repeatedly expressed his support for a reduction in the number of years of depreciable life for tenant improvements.

The bill, H.R. 2896, is primarily focused on overhauling the rules governing many facets of the taxation of multinational corporations, but also contains some domestic reforms that simplify business taxation while enhancing productivity and increasing jobs.

Expiring Tax Provisions Receive New Life
December 2003
The House approved by voice vote last Thursday a bill (H.R. 3521) that extends 15 tax provisions for one year. They were set to expire on December 31, 2003 . Important to the commercial real estate industry, the legislation includes extensions of the deduction for brownfields cleanup expenses. The Senate proposed bill, S. 1896, is much different from the House passed bill. The Senate is expected to act to extend the expiring tax provisions before adjournment.

Tort Reform Legislation Likely by Early 2004
December 2003
Legislation closely watched and supported by IREM that would reform the way class action lawsuits are handled was passed by the House of Representatives earlier this year, but has come up short of the 60 votes needed to break a filibuster in the Senate. The bills, H.R. 1115 and S. 1751, would make important changes to the rules governing class action lawsuits, moving many lawsuits from state to federal courts and limiting a number of abusive practices, such as settlements that give plaintiffs nearly useless coupons or vouchers while their lawyers reap millions and the practice of filing lawsuits in courts most likely to award multimillion dollar judgments. After passing the House in mid-June, the bill failed to overcome a filibuster in the Senate by one vote in October. Since then, Senate Republicans have reportedly reached a compromise with 3 holdout Democrats, Senators Chuck Schumer (NY), Chris Dodd (CT), and Mary Landrieu (LA), that should assure the bill's passage, either in December or sometime in January.

Energy Bill Containing Energy Efficiency Tax Deductions Stalled in State
December 2003
Legislation that would overhaul the nation's energy policy was unable to overcome a Senate filibuster and will likely be shelved until next year. The bill contained a provision favorable to the property management industry that would provide a tax deduction of up to $1.50 per square foot to anyone installing equipment in lighting, heating, cooling or hot water systems or the building envelope that meet energy cost savings targets. The bill has encountered resistance from both the right and the left because of its cost and concerns over environmental issues. It is unclear whether a workable compromise can be reached.

Internet Tax Moratorium Expires, Action Possible in January
December 2003
The Senate has failed to reach an agreement on an extension of a moratorium on the taxation of consumer access to the Internet. The bill, which would have permanently extended a prohibition that was first enacted in 1998 and expired in November, is likely to be considered when Congress returns in January. Though there is growing momentum behind the permanent ban, Senators were unable to reach agreement on how to redraft the law to take into account the growth of new forms of Internet access, such as DSL and cable modems. Proponents of the ban also ran into resistance from states who are currently exempted from the ban ( Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington, and Wisconsin ) but would have to give up their taxes on Internet access under the permanent prohibition. Also not receiving action was a proposal that would create a framework allowing states to collect sales and use taxes on the purchase of goods over the Internet. IREM has adopted statements of policy endorsing both proposals in principle.

IRS Cracks Down on Certain Workmen's Compensation Payments
December 2003
The Internal Revenue Service (IRS) has recently decided that taxpayers have been abusing provisions allowing those who make payments into trust funds in anticipation of liabilities arising out of workmen's compensation and litigation to take deductions for the payments.

The IRS believes that the provision has been abused by people who set up trusts with third parties as the custodian of record but retain access to the funds or control of their distribution. In these cases, taxpayers are not eligible to take deductions if they retain control over the funds or if the funds can be distributed before the conflict is resolved. This decision is retroactive to 1984 and the IRS will carefully scrutinize these deductions to ensure compliance.

Federal Tax Package Signed into Law
July 2003
On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTA), tax legislation designed to provide tax cuts to individuals and to businesses as an incentive for greater investment and economic activity.

Most provisions went into effect immediately upon enactment, but all will expire—some as soon as 2005. JGTA provisions directly impacting the commercial investment real estate industry are as follows:

• Capital gains tax rate reduction from 20% to 15%. Unfortunately, the depreciation recapture rate remains at 25%. A special 5% rate applies to lower-bracket (i.e., 10% and 15%) individuals. As in the past, assets must be held for more than one year to qualify for the reduced rate. REIT capital gains eligible for the reduced rate are capital gains on the sale of REIT stock and REIT capital gains distributions (except to the extent of depreciation recapture). This provision generally applies to sales, exchanges or installment payments received on or after May 6, 2003 . The 5% bracket is reduced to zero in 2008. When this provision expires, the capital gains rates will revert to 20% (10% for lower brackets.)

• Additional Bonus Depreciation – Leasehold Improvements. JGTA increases the percentage of leasehold improvement costs that may be deducted from 30% to 50% plus 1/39 th of the remaining amount of the investment. 50% bonus applies to any binding contracts entered into after May 5, 2003 . 30% bonus applies to contracts entered into before May 6, 2003 . A temporary 30% bonus depreciation provision was enacted in March 2002 that applies to all equipment and to leasehold improvements. Both the 30% and 50% bonus provisions will expire January 1, 2005 . As long as a binding contract was in place before January 1, 2005, a property may remain eligible for the bonus depreciation until January 1, 2006 . A special allowance for depreciating cars is increased from $4600 to $7650. When the bonus rules expire, the depreciable life for leasehold improvements will remain at its current level of 39 year. (Also see article on the filing extension for the depreciation bonus in this issue.)

• Increased Expensing for Small Business . When tangible property is used in a trade or business, its cost is recovered under a prescribed term of years using straight-line depreciation. Some property (not real estate) is also eligible for accelerated depreciation. A special rule permits small businesses to deduct up to $25,000 of the costs of business property (other than real estate) in the year of purchase, rather than capitalize the cost and apply depreciation allowances. This provision phases out when business investment exceeds $200,000. JGTA increases the amount that may be expensed to $100,000 and delays the phase-out until investment reaches $400,000. The legislation also resolves ongoing IRS disputes by providing that so-called “off the shelf” software used in a trade or business is eligible for the expensing rules. When this provision expires, the eligible amount will revert to $25,000.

• Tax on Dividends . Historically, dividend income has been included in adjusted gross income and taxed at ordinary rates. JGTA departs dramatically from this treatment. All dividend income will be taxed at 15% (5% for lower-bracket individuals). Real Estate Investment Trust (REIT) distributions eligible for this lower rate are REIT dividends attributable to dividends received by the REIT from non-REIT corporations such as taxable REIT subsidiaries and REIT dividends attributable to income that was subject to tax by the REIT at the corporate level (e.g., "built-in gains" or when a REIT distributes less than 100% of its taxable income). When this provision expires, dividend income (including REIT dividends) will be treated as ordinary income and taxed at the rates in effect at that time.  

Table of Effective Dates

There is both good and bad for the real estate industry in the 2003 federal tax package (The Jobs and Growth Tax Relief Reconciliation Act or JGTA). The good news is that the capital-gains tax cut should prove advantageous for property owners; the bad news is that the dividend-tax cut may hurt Real Estate Investment Trusts (REITs). REIT investors will not be getting the tax break on dividends that investors in other stocks will, as real estate investment trusts were excluded due to the fact that they already are exempt from corporate income taxes.

Moreover, REIT investors still will be required to pay a 38.6 percent tax on the dividends they receive compared to the much-lower rate of 15 percent that will apply to non-REIT dividends. As far as the capital-gains tax cut is concerned, it is hoped that it will free up equity in real estate to be invested in other projects and other real estate.

Senate Working Group on Tax Reform
July 2003
Senate Majority Leader Bill Frist (R-TN) has circulated a letter among Republicans recommending the establishment of a Senate Working Group on Tax reform. Senator George Voinovich (R-OH) will take the lead. Senator Frist has directed the Working Group to consider the tax rate structure, ways to lighten the paperwork burden, loophole closers that will reduce corporate fraud, the impact of taxation on job creation and long-term growth and the interaction of tax and social policy. Senator Frist has asked for volunteers for the Working Group. The Working Group is not expected to make any report before the 2004 election.

Depreciation Bonus – Filing Extension
July 2003
The Treasury Department and the Internal Revenue Service (IRS) have decided to extend the filing deadlines (now December 31, 2003) for the special bonus-depreciation incentives after learning that some taxpayers had been unaware of them. The additional 30% deduction applies to equipment or nonstructural tenant improvements put in service after September 10, 2001 . The deadline extension allows taxpayers who filed their federal tax returns for the tax year that included Sept. 11, 2002, but didn't claim the deduction, the chance to do so now.

House Votes to Repeal Estate Tax
July 2003
On Wednesday, June 18, 2003, the U.S. House voted to permanently repeal the Estate Tax by voting 264 – 163 to pass H.R. 8. Senate minority leadership has stated that at this time there are not enough votes in the Senate to move forward with the repeal. Currently, the estate tax is slated for repeal in 2010 (until then is incrementally reduced each year). In 2011, the estate tax returns at a rate of $3 for every $5 after a $1 million exemption.

Federal Tax Package
April 2003
Ways and Means Committee Chairman, Bill Thomas, has introduced H.R. 2, a bill embodying the President's long-term growth package. The centerpiece of the package is a proposal to eliminate the taxation of dividends at the shareholder level. H.R. 2 also contains provisions that would accelerate scheduled tax rate reductions and increase child and education tax credits.

While dividends taxation does not affect real estate directly, the mechanics of the proposal will have at least two indirect effects. First, the amount of capital flowing into low-income housing could be reduced and the low-income rental housing credit made less beneficial. Second, the exclusion of taxation on dividends (and certain accounting features that apply at the corporate level) could tilt investments toward securities.

Uncertainty about the likely revenue targets to be provided in the conference report on the Budget Resolution has had the effect of delaying House Ways and Means Committee mark up on any tax package. Chairman Bill Thomas (R-CA) had intended to mark up a tax bill the week of March 24 and to take it to the House floor the week of March 31. That process has been significantly delayed, not only because of the Budget Resolution (conference on Budget Resolution to occur April 11), but also because of debates about the merits of increasing the deficits and the unknown costs and duration of the Iraq war.