Tax Issues in the Hopper Could Hit Home Builders
Congress in the coming weeks may address tax measures of importance to the nation’s home building industry — including the alternative minimum tax, independent contractors and carried interest — builders attending the NAHB Spring Board of Directors meeting in Washington earlier this month were told.
Enacted in 1970, the alternative minimum tax, or AMT, was meant to ensure that relatively high-income individuals and corporations pay a minimum tax.
While many provisions in the income tax are indexed for inflation, the AMT is not. As a result, over the past several decades, normal income inflation has subjected increasing numbers of working families to the tax each year.
In recent years, Congress has enacted a series of one-year “patches” to shorten the reach of the AMT. The most recent patch expired last year and unless action is taken, the AMT could ensnare more than 23 million households in 2007, up from an estimated 4 million in 2006.
NAHB supports repeal of both the individual and corporate AMT.
Rep. Richard Neal (D-Mass.), chairman of the House Ways and Means Subcommittee on Select Revenues, has reportedly drafted a proposal for permanently fixing the AMT problem.
While no official draft has been released, media reports indicate it would exempt anyone making less than $250,000 in taxable income from paying the AMT and set graduated rates for incomes from $250,000 to $500,000. Those earning more than $500,000 would be hit with a roughly 4% income surtax to compensate for the AMT taxes that would be lost from families earning less than $250,000.
In the Senate, Finance Committee Chairman Max Baucus (D-Mont.) and Ranking Member Charles Grassley (R-Iowa) have introduced legislation to repeal the AMT. Baucus has not commented on the reported Ways and Means AMT legislation and other Democratic senators have indicated that they would prefer a one- or two-year fix instead of total repeal.
NAHB continues to monitor the situation closely.
On the topic of independent contractors, NAHB supports enforcement of the current law, which determines whether a specialist is an independent contractor or employee by evaluating the facts and circumstances of the job.
Businesses that violate these rules can obtain unfair advantages in the market, which hurts law-abiding businesses and individuals.
The House Ways and Means Committee recently has looked into the effects of misclassifying workers as independent contractors. Lawmakers are apparently concerned that abuses are occurring and that workers and fair competition are suffering as a result.
NAHB is watching the situation and has submitted a statement for the record expressing the association’s core principles that independent contractor businesses should be fostered, and that they should not be discriminated against by Internal Revenue Code regulations.
The third issue deals with carried or promoted interest, which are income flows paid to private equity fund participants as a disproportionate share of the participant’s initial investment.
While generally associated with hedge fund managers, this is also a common financing method for payments to builders for real estate joint ventures where outside partners provide gap financing.
Under present law, these payments are taxed as capital gains. However, members of the Senate Finance Committee have indicated that this income should be taxed at higher rates as ordinary income because it does not represent profit that can be allocated to a capital interest.
Sens. Baucus and Grassley are reportedly interested in taking a closer look at rules concerning taxation of carried and promoted interests. It is unclear if the Senate Finance Committee is considering just changes to hedge fund-carried interest income or whether a possible future proposal would also affect promoted interests as well as real estate joint ventures.
NAHB is concerned that altering the law could negatively affect the cost of residential construction financing and damage useful methods of managing business risk. At a minimum the association believes that such proposals should exempt real estate development partnerships because builder carried interest represents return on equity investment and it is also a return on the risk of entrepreneurship borne by the builder.
For more information on these tax issues, e-mail Greg Brown at NAHB, or call him at 800-368-5242 x8421.