This is particularly relevant because the Tax Cuts and Jobs Act granted REIT dividends eligibility for a 20% qualified business income deduction. This was the primary motivating factor towards existing and new mortgage funds to add or convert their funds into a REIT. The Tax Cuts and Jobs Act establishes a sunset provision for this deduction in 2026. However, many have speculated the possibility of the new Biden Administration to attempt to repeal all or part of the Tax Cuts and Jobs Act.
With the recent approval of the latest COVID Stimulus Bill, the Biden Administration has telegraphed a major tax hike as part of his plan to recoup expenditures on the stimulus bill and fund his future infrastructure agenda. Currently, we are awaiting the details, but many have speculated that this could include legislation to repeal or amend the 20% qualified business income deduction for taxpayers whose income is over a certain threshold.
The key questions to ask will be:
- How will this agenda be introduced?
- Will it include an elimination of the 20% qualified business income deduction?
- Do the Democrats have the votes for this type of legislation?
How Will This New Tax Agenda Be Introduced?
One big question is whether Democrats will actually submit formal legislation or submit it as budget reconciliation measure. Budget reconciliation will require a simple majority and is not subject to filibuster. Formal legislation is subject to filibuster which can only be broken by a vote of 60 in the Senate. It will be important to watch in what form the Democrats present their tax agenda.
Will the Biden Tax Agenda Include an Elimination of the 20% Deduction?
It is possible. Democrats have long championed a tax increase on high income taxpayers. They’ve use $400,000 per year as the threshold. But they have also used $1,000,000 per year as their threshold for increasing capital gains. While most of the press will be focused on the corporate tax rate, income tax, and capital gains, we here at Geraci will be closely following the impact on the 20% qualified business income deduction.
Can This Tax Agenda Be Passed?
If it is presented as a formal piece of legislation and not a budget reconciliation measure, the Senate will likely be able to filibuster. This is the best procedural means to kill the legislation, provided Republicans do not make concessions during the revision and amendment process. The final question we must ask ourselves is – if the 20% qualified business income deduction is repealed, what then? Even if this deduction is repealed, a REIT grants other tax benefits that are significant:
- State withholding reduction,
- ECI blocker, and
- UBTI blocker.
This issue is a very important one, not only to the private lending industry, but to small businesses and entrepreneurs. With the Biden Administration beginning the proposal and negotiation process, it is imperative you call your representatives to oppose elimination of this deduction and the other proposed increases.
If you have any questions about REITs or are interested in adding one to your mortgage fund, contact our Corporate and Securities team here.
About the author:
Kevin Kim leads Geraci LLP’s corporate & securities practice. His expertise lies in fund formation, private placements, and other securities offerings for private lenders, real estate developers and investors of all sizes. Kevin and his team have advised and prepared hundreds of securities offerings including mortgage funds, structured debt offerings, real estate syndications, crowdfunding offerings, EB-5 projects, and Qualified Opportunity Funds. Kevin passion lies in serving his clients as a pragmatic advisor focusing on real world solutions.
Kevin is also a nationally recognized expert in mortgage fund formation. Kevin is the lead instructor for the American Association of Private Lender’s Certified Fund Manager courses, where he teaches mortgage fund managers throughout the United States on fund management and securities laws.