2018 has brought this country tax reform with the recent passage Tax Cuts and Jobs Act. Called to be one of the most sweeping tax policy changes in the US in more than 30 years, the Act will have a major impact on the construction industry, presenting expanded opportunities to defer taxable income, free-up cash flow, and even pay tax at lower rates. But with all good things come a few things to be aware of. Some of the historical go-to deductions for the industry have been nixed! Below are just a few of the changes and their impact. We highly recommend you seek the advice of an accountant or financial planner to review all of the changes and how they may directly impact your business.
Accounting for Long-Term Contracts
As has been the general rule, the taxable income from long-term contracts was generally computed using the percentage-of-completion method of accounting. Construction companies with average annual gross receipts of less than $10 million were exempt from this rule for projects expected to be completed within a two-year timeframe. Now, with an increase in the exemption level to $25 million, even more companies will get to take advantage of a more tax-friendly accounting method. This is a positive since the prior cap was established in 1986 and had never adjusted for inflation.
Qualified Business Income Deduction (QBI) – Section 199A
With most construction firms operating in some form of a pass-through structure, many will qualify for the new pass-through entity deduction. A taxpayer whose taxable income does not exceed certain thresholds may claim a deduction equal to 20 percent of QBI (comprised of certain items of income, gain, deduction or loss) generated by the qualifying business. However, once those taxable income thresholds are exceeded, then the calculation becomes much more complex, as it may be adjusted by wages paid, property owned or losses incurred.
Repeal of Corporate Alternative Minimum Tax (AMT)
Boosting the benefits of the accounting changes to long-term contracts, is the repeal of the corporate AMT. Long-term contracts are required to be reported using the percentage-of-completion for AMT. With the repeal, there should come an elimination of the significant swings in tax liability resulting from the use of the completed-contract method for regular tax and the percentage-completion method for AMT purposes.
Taxation of C-Corporation Income
C-corporation income will now be taxed at a flat rate of 21%. Since the legislation was enacted before year-end, corporations with a December year-end calendar will need to adjust their deferred tax assets and liabilities shown on their 2017 financial statements.
Taxation of Pass-Through Business Income
Owners of pass-through entities and sole proprietors will be able to claim a below-the-line deduction for 20% of their net qualified business income. Qualified business income does not include S-corporation wages, guaranteed payments for services, or investment income from a pass-through entity.