How Did the Construction Industry Fare in Tax Reform?
March 2, 2018
Some of the new law’s key provisions are beneficial to the industry.
Like other businesses, construction firms will benefit from provisions such as the decrease in the maximum corporate tax rate to 21%. Another big plus is the 20% deduction for qualified business income available to pass-through entities.
Expansion of the definition of “qualified property” to include improvements to non-residential property like roofs, HVAC, alarm and security systems will ease the tax burden for those financing improvements, and potentially increase demand for such improvements.
- The elimination of several deductions may be painful.
Net Operating Losses: Negative for many businesses, including those in construction, are the changes to treatment of net operating losses (NOLs). For losses arising after 2017, the NOL deduction is limited to 80% of taxable income. The carryback provisions are repealed, though an indefinite carryforward is allowed.
- Domestic Production Activities Deduction: Contractors who took advantage of the Domestic Production Activities Deduction (Section 199) have lost a tax-minimizing technique. Section 199 had allowed qualifying businesses to claim a deduction based on 9% of their qualified production activities. Generally seen as a manufacturers’ deduction, Section 199 will also be missed by producers of other types, including construction businesses, agricultural processors and engineers.
- Entertainment Expenses: Deductions for entertainment, amusement, and recreation related to the business have been eliminated, though meals and beverages remain deductible at 50%. Until 2026, this is expanded to include food and drink offered for the employer’s convenience.
Companies with up to $25 million in gross receipts have some new options.
- The cash method of accounting is now available. Construction companies with up to $25 million in gross receipts now have the option to choose the cash method of accounting. Previously, the threshold was just $5 million; above that the accrual method was required. The cash method records transactions when cash actually changes hands, creating a simpler process for small businesses from both paperwork and tax perspectives. With more options available, it’s important to consult your tax adviser to consider both pros and cons.
- The completed-contract method is also available to more companies. The new law changes the accounting requirement for long-term contracts; now contractors between $10 million and $25 million in annual gross receipts may choose the completed-contract method instead of the percentage-of-completion method. A long-term contract is defined as one that won’t be completed during the tax year it was started. Choosing the completed-contract method allows the taxpayer to delay accounting for the gross contract price and allocable contract costs until the job is done, even while booking progress payments received during the job. Changing to the completed-contract method and deferring recognition of long-term income may simplify recordkeeping. However, there are positives and negatives to discuss with a tax adviser.
- More companies are exempt from UNICAP. Similarly, the threshold for exemption from another requirement has been raised. Some of the costs of construction are required to be capitalized – treated as part of the building produced, rather than as expenses during the production process. This falls under the Uniform Capitalization Rules (UNICAP). The gross annual receipts threshold for this requirement has been raised from $10 million to $25 million, exempting construction firms under $25 million from UNICAP. Small contractors get relief from the burden of managing the capitalization process, and will now have the option to expense these costs during the project.
Contact your tax adviser to learn more about these and other provisions within the new tax law that could affect you or your business.
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