The Tax Cuts and Jobs Act was passed by the House and Senate and signed by the President at blazing speed. Now that the dust has settled, many taxpayers find themselves wondering, “How does this impact me?” In particular, the construction industry has many things to ponder as they sit down to discuss tax reform with their tax practitioners. Outlined below are several items that all contractors should consider for 2018 and beyond.
• Corporate tax rates have been permanently reduced to a 21 percent flat tax, a reduction of 14 percent from the maximum 35 percent tax rate of the previous rate structure.
• Corporate alternative minimum tax (AMT) is repealed and any prior year AMT credit will offset some of your regular tax liability after 2017 and may be refundable.
• Pass-through businesses will now be able to claim a §199A deduction of 20 percent of qualified business income. You should consult a tax advisor for additional information.
• The average annual gross receipt thresholds for many accounting methods has increased to $25,000,000. Many contractors will be eligible to utilize the cash method of accounting, the completed contracts method for long-term contracts and simplified accounting for inventories.
• §179 expensing has been increased to a maximum of $1,000,000 on qualifying property placed in service in taxable years beginning after Dec. 31, 2017. The phase-out threshold for this expensing election has been increased to $2,500,000 of qualifying property.
• 100 percent bonus depreciation is back. All qualified assets placed in service after Sept. 27, 2017 and before Jan. 1, 2023 are eligible for the 100 percent expensing election. Note: The definition of qualified assets has been expanded to include used property.
• The depreciable period for qualified improvement property (including roofs and HVAC units) has been reduced to 15 years.
• For estates of decedents dying after Dec. 31, 2017, the estate tax exemption has been increased and adjusted for inflation and is expected to be $11,200,000 per decedent ($22,400,000 per married couple) for 2018.
• For taxpayers with average annual gross receipts exceeding $25,000,000, interest expense deductions will be limited to 30 percent of a corporation’s adjusted taxable income. Excess interest expense may be carried forward for up to five years.
• Like-Kind Exchanges are no longer permitted on personal property and may only be used for the exchange of real property.
• Entertainment expenses will no longer be deductible regardless if the expenses were business related or not.
• Deductions for employee transportation fringe benefits (parking and mass transit) are no longer allowed.
• Moving expenses are no longer deductible and employer moving expense reimbursements will no longer be excluded from taxable income.
• The individual AMT has been retained. Note: The percentage-of-completion method is required for AMT purposes.
• Payments for college athletic seating rights are no longer deductible as charitable contributions.
• The individual mandate of the Affordable Care Act (ACA) has been repealed.
• “Excess business losses” will no longer be deductible by a noncorporate taxpayer. The excess losses will carryforward to offset future business income.
• Self-Created property will no longer be treated as a capital asset. Accordingly, the sale of self-created patents and models will result in ordinary gain.
With such significant change to the existing tax laws, it is important to consult with your tax advisor to determine the impact of each of these changes. Additionally, it is worth re-visiting your choice of entity structure as some taxpayers may find a greater benefit with another entity selection.
Dannible & McKee, LLP, a Syracuse, NY based public accounting firm with more than 90 professionals has been providing services to the construction industry since its inception in 1978. You may contact them at 315.472.9127 or visit the firm online at www.dmcpas.com.