by Christina Brooks
On December 22nd, 2017 the Tax Cuts and Jobs Act was signed into law. The bill makes major changes to the individual, corporate and international tax code which will have a far-reaching impact on construction companies, investors and employees. Below is a discussion of some of the key provisions impacting closely held construction companies and their stakeholders. We strongly recommend meeting with your trusted tax advisor to discuss your specific tax situation and how the new law will affect you. It may make sense to modify existing business entity structures as well as business and reporting practices as a result of the new tax law.
The following energy incentives—commonly used by construction, real estate, and engineering companies—are extended through December 31, 2017, under the Bipartisan Budget :
This extender package was passed on February 9, 2018. Taxpayers who did not take the deduction or credit with their original return should amend their 2017 returns to claim the incentives.
For any business that has over $25 million in average annual gross receipts, there is a limitation on the amount allowed as a deduction for business interest in any year. Any interest that isn’t allowed is carried forward to the following tax year until it is used.
The deduction for interest can’t exceed the sum of (a) the taxpayer’s business interest income, plus (b) 30% of the taxpayer’s adjusted taxable income, plus (c) the taxpayer’s floor plan financing interest for the tax year.
A trade or business that is a real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business can make an election to be an “electing real property trade or business”. An electing real property trade or business is not subject to the limitations on interest expense deduction. However, they must use a slower depreciation method called ADS to depreciate any of their non-residential real property, residential rental property, and qualified improvement property.
Here are more general changes brought about by tax reform. This is not an all-inclusive list of the many changes from tax reform but highlights the major changes that impact construction companies and its stakeholders.
The following permanent changes apply beginning January 1, 2018:
The following changes to individual taxation are effective for taxable years beginning after December 31, 2017, and before January 1, 2026, unless otherwise stated.
For the approximately 95% of businesses not currently set to reap the benefit of the corporate tax rate reduction, such as entities structured as partnerships, S Corporations, and sole proprietorships, the tax bill allows an up to 20% deduction for “qualified business income”.
Qualified business income is income effectively connected with a US trade or business. W-2 wages and guaranteed payments do not count in determining qualified business income.
The qualified business income deduction is limited to the greater of two thresholds for taxpayers whose taxable income exceeds the threshold amount of $157,500 ($315,000 in the case of a joint ):
Taxpayers in certain specified service industries such as lawyers, accountants, and consultants are generally precluded from taking the deduction unless they are below the taxable income threshold amount above. However, engineers and architects are specifically excluded from the definition of “specified service” industries.
If a taxpayer has net losses from qualified business activities, those losses are carried forward and offset future year’s qualified business income.
The qualified business income deduction and the individual rate reductions are currently set to only apply to tax years beginning after December 31, 2017, and before January 1, 2026.
Are you researching what all this means for you? Reach out to Redpath’s Christina Brooks, CPA today.
Christina Brooks is a senior manager in the business tax services area at Redpath and Company, providing tax consulting and compliance services to closely-held businesses. Christina is a member of the Construction, Real Estate and Engineering Practice Team. She has provided public accounting services since 2008 and has been at Redpath and Company since 2013.More posts by Christina Brooks
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