From left: Cory Grant, Russ Broadway, and James Gergurich. | Image by Carrie Rossenfeld

Tax Planning in the Era of New Legislation

Carrie Rossenfeld Event Coverage

The Tax Cuts and Jobs Act of 2017 created a lot of questions for real estate funds, companies, and investors as they planned for the future of their business. Wednesday’s “Breakfast at the BMC” event at the Alexandria at Torrey Pines in San Diego, titled “Corporate and Individual Impacts of the Tax Cuts and Jobs Act of 2017 and How to React to It,” presented by the Burnham-Moores Center for Real Estate at the University of San Diego School of Business, strived to answer many of those questions.

Cory Grant, founding partner and shareholder at Grant Hinkle and Jacobs, said, according to a recent survey of businesses, retention of employees and taxes are the key issues for business owners today. Retaining key talent increases a business’s value up to sixfold. The new tax laws can impact this retention.

James Gergurich, a tax principal in the San Diego office of KPMG, explained that the Act changed the tax rates by creating new tax brackets—10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent—with no change to the capital-gains or investment-income tax. Personal exemptions were repealed, and the standard deduction increased, with the individual deduction limited to $10,000 for state income and property taxes.

Grant said there will be a lot of changes to come with the shakeout of the new tax code in the net six to 18 months, “so you want to plan flexibly.”

The speakers said deciding whether to set up your business with a pass-through, corporate, or REIT structure requires a considerable amount of evaluation, since the new code set a lot of parts in motion. Certain definitions—such a professional-services income—are narrower, creating questions and complications. “It will take time before there is much more clarity on this,” said Russ Broadway, a tax-account leader based in EY’s San Diego office.

As for California itself, many companies are considering moving out of state because of the high personal and corporate tax rates. Broadway said one issue to consider is if the investors themselves are based in California; if not, the tax rules state where they are based may apply. Gergurich added that companies should be aware that in this case, both states could have a claim to taxes. Broadway advised thinking through the nature of income-state tax considerations and consulting a tax advisor because the current situation is not a normal course.

Grant pointed out that one thing companies should consider in retaining key talent in a way that’s tax efficient for both the firm and its employees is the value of an employee’s specialized knowledge in a particular subject. It may be worthwhile to set aside a pool of funds as incentive for that employee to remain with the firm for a set period of time rather than risk losing them to a competitor offering a better compensation package.

Looking specifically at real estate companies, Broadway said real estate funds are getting a lot more questions from investors now because of the new tax laws than they had in the past, and Gergurich added that foreign investors are also seeking more guidance on structure and how the changes will impact them. He said it’s important to keep in mind the impact your tax decisions will have on various stakeholders, including tenants, investors and nonprofit sources of capital, and institutions and private equity. “It’s not just how it impacts your bottom line, but also the other constituencies.”