In December 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017, the largest change to tax policy in decades. With most provisions going into effect in the coming year, it is important that construction industry leaders understand what has changed and how it will impact their companies. We recently sat down with firm partner Brian Coller to get his take on how the new legislation will impact construction companies.
With extensive experience working in the construction and transportation industries, Brian’s clients can rely on him to solve problems and identify opportunities. He is also actively involved with the Construction Financial Management Association.
Key provisions impacting construction companies include:
Federal Tax Reform:
- 21% federal income tax rate for contractors operating as a C corporation. While this rate is appealing, there is still the double taxation of dividends withdrawn from the company.
- Contractors operating as pass-through entities may benefit from a decrease in the top individual federal tax rate from 39.6% to 37%.
- Contractors will benefit from increased depreciation limits:
- 100% bonus depreciation applies to acquisitions of both new and used property.
- Section 179 depreciation deduction limit increased to $1M, which can be utilized on new and used property, as well as certain structural components of real property, including HVAC, roofs, fire protection, alarm and security systems.
- Contractors with annual revenue less than $25M are now permitted to use the cash basis method of accounting for their overall tax as well as accounting for their long-term contracts.
- Elimination of alternative minimum tax (AMT) for C corporations. AMT still applies to individuals, meaning contractors operating as pass-thru entities will continue to calculate their long-term contracts on the percentage of completion method for AMT purposes.
- Contractors operating as pass-through entities who previously claimed the Section 199 Domestic Production Activities Deduction (DPAD) will no longer be able to reduce their tax liability by this deduction. However many will benefit from the Section 199A Qualified Business Income (QBI) deduction, which effectively lowers the top tax rate from 37% to 29.6% by allowing business owners a 20% deduction. It is yet to be decided to what extent rental properties will qualify for the QBI deduction.
- Net operating losses created by the business are limited and can only offset up to 80% of future taxable income. Contractors are no longer able to carry back a loss, but losses carry forward indefinitely.
- Limited deductibility for meals and entertainment expenses.
- Like-kind exchanges allow contractors to trade in an asset on the purchase of a similar asset without triggering a tax obligation. Under the new tax law, the only assets that qualify for the like-kind treatment is the trade of real property for other real property.
Iowa Governor Kim Reynolds signed Iowa’s tax reform bill, Senate File 2417, into law on May 30, 2018. Some key provisions are listed below:
Iowa Tax Reform:
- No bonus depreciation allowed for Iowa, and a limit on section 179 depreciation deduction of $70,000.
- Iowa will continue to recognize like-kind exchanges for personal property even though federal law does not.
- Contractors and subcontractors are no longer allowed to claim the research and development credit for Iowa.
- Geothermal heat pump tax credit and geothermal tax credit are to be eliminated beginning in 2019.
- Iowa will continue to recognize Section 199 (DPAD) even though for federal tax purposes it has been repealed. Iowa does not initially recognize the Section 199A (QBI) deduction but will phase-in the deduction over time.
Now is the time to initiate conversations with your advisor to prepare for filing 2018 taxes. Construction expert Brian Coller is on hand to help you evaluate your options. Start here to get a conversation going.
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