Tax reform has been a topic that has been in the news for quite some time.
Simplifying the tax code, reducing taxes on businesses, creating more favorable depreciation and expensing rules, and reducing the individual tax rate were a few of the changes implemented in the Tax Cuts and Jobs Act of 2017. While it is the most meaningful change to the federal tax code in almost thirty years, many businesses, especially those in construction, may be unsure how the changes will impact them. The good news is there are several beneficial changes including favorable changes to bonus depreciation rules, higher Section 179d expensing limits, cash method of accounting rule changes, and a new business income deduction for certain business owners. To help clients, prospects and others understand the changes and how they may impact their company, Hanson & Co has provided a summary of the most significant changes below.
Key Tax Law Changes
- Cash Method of Accounting – Most construction entities will be allowed to use the cash method of accounting, including not keeping inventory, if the entity not exceed the $25 million in gross receipts for the prior year years. 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, $157,500 filing as single, the 20% deduction is 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 a percentage of 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. 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. Construction companies 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 construction companies.
- Like-Kind Exchanges – Under prior regulations, like-kind exchanges were given to properties held for use in a trade, business or for investment. This rule has been changed and it now applies only to real property not held primarily for sale. This means that personal property items such as construction equipment is not eligible for the tax-free exchange beginning January 1, 2018.
- Tax Credits + Incentives – As part of the effort to simplify the tax code many well-known deductions and credits were eliminated. Only a few of interest to the industry remain including the Research and Development Tax Credit, Work Opportunity Tax Credit, Low Income Housing Credit, New Markets Tax Credit and the Historic Tax Credit (with a reduction to tax benefit received).
- 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%.
- Domestic Production Activities Deduction (DPAD) Repealed -Under Section 199 previously the DPAD deduction, which was derived as a % of net income and limited by 50% of W2 wages was a popular deduction for construction companies and other taxpayers deriving income from “qualified production activities” performed in the United States. The tax reform bill has repealed this deduction.
The Tax Cuts and Jobs Act has made several changes that will impact how construction companies calculate and pay taxes. The good news is that most will see a reduction in overall taxes in 2018. If you have questions about how tax reform will impact your construction company or need assistance with an audit or tax issue, Hanson & Co can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.