The new tax reform law is the most significant tax legislation in decades. Now construction companies are trying to digest the details and evaluate how the changes will impact their tax situation. One key objective was to reduce taxes on companies doing business in the U.S. to make them more competitive. Prior to the change, the U.S. had one of the highest corporate tax rates globally.
While tax reform has been acknowledged as a good thing for businesses, many construction companies are still unsure how they will benefit from it. The good news is there are tax saving opportunities for industry companies, both large and small, that will result in immediate savings. Some of the changes include; new depreciation rules, expanded Section 179d limits, accounting method changes, percentage of completion requirement changes as well as a new deduction for certain business owners. To help clients, prospects and others understand the changes, Smith Schafer has provided a summary of key details below.
KEY TAX REFORM CHANGES FOR CONSTRUCTION INDUSTRY
- Cash Accounting Method. Under the new tax laws, most construction companies will be permitted to use the cash method of accounting which includes not keeping inventory. This change applies to companies that did not exceed $25M in gross receipts for the prior year.
- Percentage of Completion Method. Small construction contracts completed within the next year are exempt from using the percentage of completion method. It is important to note that the taxpayer must be able to pass the $25M gross receipts test.
- 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 time-frame, the bonus amounts are scheduled to decrease by 20% annually.
- Expanded Section 179d Limits. The new law increased the maximum amount a taxpayer can immediately deduct up to $1M in the year it was acquired. Beyond this, construction companies can now include roofs, HVAC, security, fire protection and alarm systems if they were installed after a building was constructed. This change creates additional tax saving opportunities for industry companies.
- Qualified Business Income Deduction. There is a new 20% qualified business income deduction for owners of flow through entities through 2025. Examples of flow through entities include partnerships, limited liability companies, and S corporations. The 20% deduction is limited to the greater of two thresholds including 50% of the W-2 wages paid by the business or 25% of the W-2 ranges paid by the business plus 2.5% of the unadjusted basis of the qualified tangible property. Be aware, these limits do not apply to taxpayers with income less than $157,500 or married couples with income less than $315,000.
- 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. 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%.
Under the new laws there is an abundance of tax saving opportunities available that extend beyond what is listed above. It is important to review your tax planning strategies to ensure you are in the best position possible. If you have questions about how tax reform will impact your situation or would like assistance with tax planning for 2019, Smith Schafer can help.
Smith Schafer is a recognized leader in providing accounting, auditing and consulting services to the construction and real estate industry. Our Construction Group, comprised of numerous professionals, is committed to serving over 500 Minnesota construction and real estate entities. For additional information, click here to contact us. We look forward to speaking with you soon.