Congress and the Trump administration gave business and individual tax-payers a holiday gift at the end of 2017 when they passed tax reform legislation.
Known as the Tax Cuts and Jobs Act of 2017, the changes made to the tax code are the most significant in over 30 years. While one of the goals of tax reform was simplification, many would argue that it actually increased complexity and left many businesses un- sure how the changes will impact them, especially those in construction.
The new tax law has significantly changed much of the tax code including reduction in value or elimination of tax deductions and credits, enhanced depreciation rules, reduced tax rates and brackets, and even new deductions for certain business owners. The good news for many businesses (and business owners) is that their overall tax liability for 2018 will most likely be reduced.
HMWC CPAs & Business Advisors has provided a summary of key points below to help those in the construction industry wade through the many changes put in place by the new tax law and focus on those that will likely impact them most.
Key Tax Law Changes
• Cash Method of Accounting – Most construction entities will be allowed to use the cash method of accounting if the entity did not exceed the $25 million in gross receipts for the prior year. This will have an impact on how construction companies recognize and report revenue.
• Percentage of Completion Method – Small construction contracts that commence after December 31, 2017 and are completed within two years are no longer required to use the percentage-of-completion method. This assumes the taxpayer meets the $25M average gross receipts test for the year the contract started.
• Pass Through Business Income – Through 2025, there is a new 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships. It’s important to note that taxpayers with income above $315,000 filing jointly or $157,500 filing as single, the 20% deduction maybe subject to phase-in restrictions. For qualifying business owners this represents another opportunity to reduce taxes.
• Bonus Depreciation – This allows a company to immediately deduct the cost of the property when it is acquired rather than doing so over a period of years. Under the new law, construction companies can take advantage of 100% bonus depreciation on new and used property. The bonus depreciation level is available for property acquired and placed into service between September 28, 2017 and December 31, 2022. After that timeframe the bonus amounts are scheduled to decrease by 20% annually.
• Section 179d Expensing – This allows a company to immediately deduct a certain amount of the cost of qualifying property in the year it was acquired. Under the new law, the maximum amount which can be expensed is increased to $1M. Contractors and other Real Estate Investors are now able to include roofs, HVAC, alarm systems and security systems in non- residential buildings so long as they were added after the building was placed into service. This change creates an additional tax saving opportunity for qualifying companies.
• Business Interest Expense Deduction – Construction companies that leverage financing to pay for new equipment will be impacted by changes to this deduction. Under the new law, businesses with annual gross receipts of over $25M will now have this deduction limited to 30% of adjusted taxable income. This is a dramatic change from previous regulations which allowed qualifying interest expenses to be fully deductible.
• Meal & Entertainment Expenses – Under prior regulations a company could deduct 50% of the cost of business meals and entertainment and 100% of meals offered to employees as a convenience to the employer (i.e. company cafeteria). The new law has eliminated the deduction for entertainment expenses and reduced the deduction for meals offered to employees as a convenience to the employer to 50%.
• Limitations on Excess Business
Loss – For tax years beginning after December 31, 2017 and before January 1, 2026, business losses in excess of $500,000 if filing jointly or $250,000 for other individuals will be disallowed. Instead, they are carried forward and treated as part of the taxpayer’s net operating loss (NOL) carryforward in subsequent tax years.
• Net Operating Losses – Beginning in 2018, taxpayers will no longer be able to carry back net operating losses to the two prior years as allowed under prior law. These losses must be carried forward and their utilization will be limited to 80% of taxable income.
• Domestic Production Activities Deduction – Under the new law, the 9% deduction many construction companies and contractors had taken advantage of previously for income derived from “qualifying production activities” has been eliminate.
Although several tax incentives and benefits have been eliminated, tax reform has created several new tax savings opportunities. For answers about tax reform and its impact contact HWMC CPAs & Business Advisors’ Nic Waldenmayer at 714/505-9000.
By Nicolas Waldenmayer, CPA, CCIFP, MBT
HNWC CPAs & Business Advisors