From the initial analysis done on the 2017 tax reform bill, the construction and real estate industries appear to significantly benefit from the new legislation. Several provisions will need to be closely examined, from the reduction in the corporate rate to pass-through entity tax relief. We recently sat down with firm partner Sarah Zimmerman to get her take on the new legislation.
Sarah helps lead the construction and real estate practices for the firm and is actively involved in several industry related organizations including the Associated General Contractors of Iowa, the Greater Cedar Rapids Housing & Building Association and Master Builders of Iowa.
Here are three tax specific areas to note:
1. Qualified business income (QBI) deduction for pass-through entities (partnerships, S-corporations and sole proprietorships), paired with C-corporation tax rate reduction to a flat 21%. Business owners should review their current entity structure, along with their future goals and determine the most beneficial structure to meet those goals. You can read more about this deduction here.
2. Accelerated depreciation options increased significantly with changes to Section 179 and bonus depreciation. Section 179 increased to $1 million, and 100% bonus depreciation is now available for both new and used qualified property placed in service from September 27, 2017 through 2022. These changes could significantly reduce tax liabilities for construction and real estate companies that rely on accelerated depreciation for personal property and new qualified improvement property.
3. Taxpayers under $25 million in average gross receipts (for the last three years) are no longer required to use the accrual basis method of accounting and may adopt the cash basis method of accounting for income tax purposes (including those with inventory). Advance planning is essential to optimize tax deductions related to the conversion.
Two recently issued Accounting Standards Updates (ASU) business owners should plan for now:
4. Lease Accounting – the way you report your operating leases may be changing. The FASB issued ASU 2016-02, which would require operating leases to be reported on the balance sheet, which could potentially affect your working capital and bank covenants. Although this update isn’t effective for privately held companies until 2020, now is the time to review your current leasing structure and plan for these changes.
5. Revenue Recognition – the standards for recording and recognizing revenue are changing for most privately held companies beginning in 2019. This update (ASU 2014-09) requires a five step process for determining when revenue should be recognized. Contractors will feel the burden of change most heavily as it relates to their contracts with customers, and may need to reevaluate the structure of those contracts.
When considering which of these changes to tackle first, Sarah advises to focus on the areas that could have the greatest impact on your organization, “Changes of this magnitude will require business owners to carefully weigh the tax and financial impact on their organization. Advance planning is key as there is no one-size-fits all answer.”
Now is the time to initiate those conversations with your tax advisor. Construction and real estate expert Sarah Zimmerman is on hand to help you evaluate your options. Start here to get a conversation going.
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