On 22 December, the President signed significant changes to the US tax code into law welcomed by many corporate and individual tax-payers.
On 22 December, the President signed significant changes to the US tax code into law (Public Law No. 115-97). The legislation ushers in an interesting new year as diverse constituents, from general partners and developers to domestic and foreign pension investors, dissect the new law to identify the underlying opportunities and challenges it creates.
Among the biggest-impact elements of the new law, a wide swath of investors may cheer the new 21-percent corporate tax rate, down from 35 percent.
Some investors may also be pleased with the details regarding interest deductibility. After earlier versions of the legislation threatened to severely limit the amount of interest expense certain taxpayers could deduct based on worldwide ratios, the worldwide related limit was scrapped in its entirety from the final legislation. The final legislation contains a revised, somewhat expanded version of the earnings stripping rules, however. In addition, the final legislation has a relatively limited impact on certain other types of base stripping payments from the US, as compared to earlier versions of proposed tax reform rules.
The new tax law also expands the ability of some companies to accelerate depreciation and enjoy immediate expensing of certain capital expenditures.
Also, in the category of “It could have been worse,” many institutional investors may be pleased that certain key elements of the existing business tax system were retained. Some sponsors and developers may be pleased that the tax-preferred status of private-activity bonds and tax free municipal bonds has been retained, so those bonds can continue to be a useful tool for financing infrastructure projects.
The new law also raises a number of considerations specific to different groups of infrastructure investors.
For example, for domestic pension systems, proposals to eliminate their super tax-exempt status on unrelated business income did not materialize, so they can continue to invest in domestic assets largely without US tax considerations.
For foreign investors, although the 2017 tax overhaul did not extend FIRPTA tax exemptions (Foreign Investment in Real Property Tax Act) to a larger class of investors as many had hoped, it did reduce the withholding rate on FIRPTA gains. The reduced corporate tax rate also would be available to many of the common domestic blocker structures.
Finally, general partners also escaped some proposed changes to the tax code, particularly some proposals that would have added adverse ordinary income `carry' rules. Broad legislation previously had been suggested to tax all or most carry of investment partnerships at ordinary income rates rather than the lower long term capital gains rate that is often applied under current law. The new law now requires that certain carried interests be held for a minimum of three years to enjoy long term capital gains rates, but for many infrastructure (long term) investments such holding period should not be problematic.
In the midst of this largely good news, infrastructure sponsors, developers, and investors will need to perform careful analysis to recognize the precise impacts on their projects. For example, the temporary new $10,000 limit on individuals' deductions of some state and local taxes may prompt some investors to consider the possibility of incorporation. Fund complexes that apply different stacked partnerships will also want to carefully analyze their structures since revised rules can apply to limit the tiering up of interest deductibility capacity. Corporations will need to take into account new restrictions on the use of net operating losses and their ability to use this important tax attribute as an income shield. Thus, taxpayers will need to review their historic models and assumptions.
“In addition to studying the immediate effects of the tax bill, investors will want to watch for middle- and longer-term impacts, as industry participants adapt their pricing and structures to respond to changes in their operating landscape.”
In the meantime, investors will be wise to hunker down with their financial models and quantify the real impacts of this massive tax package, to determine the exact opportunities, costs and complexities of the new law for the infrastructure investment community.
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