What a great way to start a new year —big federal tax cuts for almost everybody—which are likely to jump-start a major building boom.
It is a historic tax reform for the construction industry as contractors have paid the highest effective tax rate of any sector of the economy. We are a capital-intensive, domestically oriented industry comprised mostly of small, family-owned and closely held companies, all of which will benefit from the new law.
The majority of small construction companies will benefit from the new qualified pass-through income provisions. It creates a 20 percent deduction for the first $315,000 of qualified business income for joint filers of pass-through businesses such as partnerships, sole proprietorships, Subchapter S corporations and limited liability companies (LLCs). For income above that threshold, the legislation phases in limits, producing an effective marginal tax rate of no more than 29.6 percent—still ten percent below the current rate for high-income owners.
Changes to various accounting methods will ease burdens for many small contractors and the doubling of the estate tax exemption to $11 million is a big win for our industry’s family businesses.
Bigger firms will feel a boost from the largest corporate rate cut in U.S. history, reducing the federal corporate tax from 35 percent to 21 percent. Other pluses include the full repeal of the corporate alternative minimum tax (AMT).
Building Boom?
It allows full expensing of business equipment for assets placed in service through 2022, with a phase-out (reduced by 20 percentage points per year) of that benefit from 2023 to 2027. This provision is good for our businesses by putting new equipment purchases on the front burner.
Another plus for public works contractors—the new bill also retains private activity bonds (PABs), which represent a near-19 percent of the municipal bond market, or almost $85 billion. PABs allow private businesses working on public projects to borrow at the same tax-free rate as government agencies.
It may spur a construction boom, as it will allow businesses to immediately expense multiple types of asset purchases, including real estate. This may be particularly true in the growing e-commerce sector, where companies might now be able to take advantage of the new expensing rules to build more of their own warehouses.
The new law won’t be all roses, but the pluses seem to outweigh the minuses right now. The bill is supposed to simplify the tax code, but for the next year or two you might want to have your CPAs on speed-dial.
By Brandon Pensick, ECA President
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