Last week the House Ways and Means Committee approved three tax-relief measures it says are intended to promote economic growth and investment by, among other things, reversing or scaling back changes and incentives enacted in the Tax Cuts and Jobs Act (TCJA) and the Inflation Reduction Act (IRA) that many in the business community feel are detrimental to growth and innovation. Take a look below at two proposals of particular interest to commercial real estate investors.
Bonus Depreciation
As many of you already know, this year the TCJA began cutting back on its major incentive to invest in qualified commercial properties and improvements that had given owners the option to apply 100% bonus depreciation when filing their income taxes. Despite having bipartisan support in the past, extension of the incentive failed to make it into the final version of the IRA that went into effect in 2023. Consequently, the bonus depreciation rate now stands at 80% for this year, and deductions are set to drop by 20% each successive year until the program phases out completely by 2027.
However, the proposed Build It in America Act (H.R. 3938) could pave the way for a temporary and retroactive extension of the full 100% bonus rate. Among other proposed reversals of TCJA provisions, the act would specifically:
- Reinstate 100% bonus depreciation effective January 1, 2023
- Allow 100% bonus depreciation for most qualified property placed in service after December 31, 2022 and before January 1, 2026
- Retain 20% bonus depreciation for most qualified property placed in service after December 31, 2025 and before January 1, 2027
You can read the Committee’s detailed summary of this and other proposed provisions concerning research expenditures and business interest expenses here.
Opportunity Zones
The proposed Small Business Jobs Act (H.R. 3937) contains several provisions affecting the Opportunity Zone (OZ) program originally enacted as part of the TCJA, specifically:
- Creation of a new “rural” OZ program, enabling rural communities designated as in persistent poverty to benefit from the same recovery and development that OZs have brought to urban areas struggling to attract investment and capital. As with urban OZs, investors would enjoy deferred capital gains and additional benefits from holding their investments for 5, 7 or 10 years.
- Qualifying rural OZ investments would begin after December 31, 2023 and end December 31, 2032. Significant is that the proposal extends the program timing only to rural OZ investments. Existing OZ investments would still expire on December 31, 2026.
- Increased information reporting would be required for funds, businesses and investors in both urban and rural OZs, along with more periodic public reporting by the Treasury regarding OZs and investments into them.
Next Steps
It’s expected that the three proposed bills (Build It in America Act, Small Business Jobs Act, Tax Cuts for Working Families Act) will be consolidated into a single one called the American Families and Jobs Act before the legislation eventually gets brought up for a vote in the House. However, when that will happen is unclear, and even if it passes in the Republican-controlled House it will face steep opposition in the Democratic-controlled Senate (all proposed Democratic amendments failed in the Committee). When all is said and done, who knows what the final package will ultimately look like . . .
However, since it appears that at least some of the provisions above have bipartisan support, hopefully they will make the final cut. As always, we’ll continue to watch what happens next and keep you informed of the latest developments!
