Trump Signs Major Tax Overhaul into Law, PABs Preserved

On Dec. 22, President Trump signed the $1.5 trillion tax overhaul legislation into law. Prior to the signing, House and Senate GOP leadership filed a conference report on the Tax Cuts and Jobs Act, reconciling the differences between the House-passed and Senate-passed versions of the bill. The House and Senate both approved the conference report and the House passed the bill by a vote of 227 – 203, with 12 Republicans and all Democrats voting against it. It passed the Senate by a vote of 51 – 48 on a party-line vote.

The updated reconciled version of the Tax Cuts and Jobs Act signed into law contains the following provisions that impact LIHTC and the affordable housing industry:

Lowers corporate tax rate from 35 to 21 percent, effective Jan. 1, 2018. A lower corporate tax rate reduces the amount of equity that can be raised through the LIHTC, which in turn reduces the amount of affordable housing that can be developed and preserved each year. A recent analysis by Novogradac & Co. estimates that the final version of the tax reform bill would reduce affordable rental housing production by nearly 235,000 homes over the next decade. And a majority of the impact is a result of the loss of investor equity from the reduced corporate rate.

Retains the LIHTC, with no modifications. The amendment that Senator Pat Roberts (R-KS) added to the Senate bill was removed in the final bill. This amendment would have replaced the existing LIHTC general public use requirement exception for artist housing with one for veterans; treated rural areas as difficult development areas for purposes of receiving a basis boost; and reduced the maximum basis boost for all types of boost-eligible developments from 130 to 125 percent.

Retains private activity bonds (PABs), including multifamily Housing Bonds. Private activity bonds provide critical financing to more than half of all LIHTC developments and trigger the “4 percent” Housing Credit. The House bill had proposed repealing private activity bonds. And House Ways and Means Committee Chairman Kevin Brady had been advocating for reforms to private activity bonds even if they were preserved. Having PABs retained in the tax bill without any limitations was a relief for the affordable housing industry.

Creates Qualified Opportunity Zones as proposed under the Investing in Opportunity Act (S. 293), which would encourage investments in distressed communities through capital gains deferrals. Under this program, governors may submit nominations for a limited number of opportunity zones to the Department of the Treasury for certification and designation. Governors must give particular consideration to areas that are currently the focus of mutually reinforcing state, local, or private economic development initiatives to attract investment and foster startup activity; have demonstrated success in geographically targeted development programs such as promise zones, the New Markets Tax Credit, empowerment zones, and renewal communities; and have recently experienced significant layoffs due to business closures or relocations. Taxpayers may temporarily defer the recognition of capital gains that are invested in opportunity zones. Investments in opportunity zones or opportunity funds that are held for at least five years are eligible for capital gains tax reductions or exemptions, depending on how long the investment is held.

Creates a base erosion and anti-abuse tax (BEAT). This program would affect banks’ ability to use the LIHTC and other credits to offset certain taxes related to foreign earnings and earnings going to foreign parent companies. BEAT was included in the Senate bill and did make its way into the conference report. The BEAT provision in the Senate-passed version of the bill would have only allowed one credit, the Research and Development Credit, to be taken against the BEAT, but the conference version also exempts the LIHTC at 80 percent of the value of the credits.