On December 22, 2017, President Trump signed into law H.R. 1, formerly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA). 2017 tax reform is the first major tax overhaul in 30 years, and will affect individuals, all types of businesses, tax-exempt entities, international taxation, and many other areas of tax law.
Although the act is final, there is still a significant amount of guidance needed before we can really understand all of the tax reform. Below are just a few of the tax provisions affecting the construction industry.
Depreciation Changes
For purchases made after September 27, 2017, qualified property is eligible for 100% accelerated depreciation. Qualified property can now be new or used. Qualified property includes work trucks, equipment, and various real property improvements. The change is subtle if your company has been utilizing Section 179 depreciation, but depending on the size of the company, there may be new opportunities to take deductions in the year qualified property is purchased.
Domestic Productions Activity Deduction (DPAD)
DPAD has allowed most contractors to take a nine percent deduction related to their domestic activities for many years. With the tax changes, DPAD was eliminated. The lowering of various tax rates for corporations and individuals, along with a new 20% deduction for individuals on their pass through income, led congress to remove the favorable construction industry DPAD deduction.
Corporate tax change
The C-Corporation (C-Corp) tax rate has been reduced to a 21% flat tax rate. Also, C-corp alternative minimum tax (AMT) has been eliminated. These two changes, combined, may potentially make a C-Corp a more attractive entity type for your company if you are currently filing as a different type.
Average Gross Receipts Less Than $25 Million in Revenue
Cash basis taxpayers often enjoy deferring some of their revenue to the next tax year. Under the cash method revenue need not be recognized until received. For tax years beginning in 2018, tax payers can now elect to be treated as a cash basis taxpayer if their gross revenue is below $25 million.
Accounting for long-term contracts is also affected by the new threshold. Companies are exempt from having to use the percentage-of-completion method on contracts entered into in 2018. This opens up a number of possibilities for companies to make a change to a more beneficial long-term contract method. Changing from accrual to cash, your inventory method, and/or your method for accounting for contracts requires a change in accounting method to be made.
Net Operating Loss (NOL)
In construction, revenue cycles can be uneven. Companies experience great years and then can follow them with down years. NOLs allow companies to smooth their windfalls with their losers by allowing them to carryback losses to previous years. By carrying back NOLs they are able to get tax refunds for taxes previously paid. The ability to do this can significantly help with cash flows in leaner years.
With the tax changes, NOLs from tax years beginning in 2018 will no longer be allowed to be carried back. Taxpayers can only carry forward their NOLs. Carryforward deductions are now limited to 80% of taxable income.
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Guest blogger: Cascade Business News written by Neil Langlois, CPA