Construction companies advised to enjoy benefits of federal tax act
General contractors and other firms in the design and construction industries are well poised to benefit from many of the provisions of the Tax Cuts and Jobs Act (TCJA), passed last December. Starting Jan. 1, contractors doing business as C corporations saw their federal tax rate reduced to 21 percent from as high as 35 percent. Those who are sole proprietors, partnerships and limited liability companies (LLCs) saw their rates drop from 39.6 percent to 37 percent.
Tax attorney Larry Brant, principal at Garvey Schubert Barer PC, said replacing the tiered corporate tax rate structure with a flat 21 percent tax rate could decrease the federal income taxes construction companies operating as C corporations pay by as much as 40 percent.
Brant also said he and many other tax attorneys were not only surprised to see the new tax rates, but that any tax reform legislation was passed. Historically, both chambers of Congress hold multiple hearings and lawmakers engage in extensive conversations with representatives from multiple industries before reform legislation is passed. However, in fall 2017, not much progress appeared to have been made on tax reform.
"I didn't have an expectation that any form of tax reform would be passed since virtually no hearings had occurred on (Capitol) Hill. I didn't believe a tax law was going to be passed before the holidays," he said. "Then all of the sudden in late November 2017 it appeared that maybe we were going to see a tax bill. I had no idea we were going to see such a pervasive tax bill."
Brant noted that some provisions of the TCJA may or may not apply at the state or local level, depending upon how state and local governments respond to them. And, further complicating matters, as of last week the IRS had yet to provide regulatory guidance regarding many of the changes.
In general, though, the TCJA does lower tax rates for most companies. Construction companies of all sizes should benefit from the reduction in the federal tax rates.
"With the adoption of the lower C corporation rate, a lower individual tax rate from 39.6 percent to 37 percent, and a potential deduction under new Code Section 199A for pass-through entities, Congress has put smaller business entities and large business entities on a much more level playing field," he said.
The TCJA's complete elimination of the corporate alternative minimum tax is another benefit for construction companies. Brant advised them to re-evaluate their corporate structure to make the most of the new tax rates, the elimination of the corporate alternative minimum tax and other new tax provisions.
"There is no one-size-fits-all and corporate structure has to be looked at more than ever before, and it should probably be reviewed on a periodic basis," he said. "Taxpayers should consult with a qualified tax adviser to determine whether their business entity is appropriate for tax purposes."
Under the TCJA, some companies can also expense the cost of depreciable, tangible personal property used in their businesses without significant limitations. This includes construction equipment, trucks and other property.
One change that appears to be a drawback for construction companies and others is that business interest deductions are now more limited. Also, entertainment expenses used to be 50 percent deductible and have now been completely eliminated. Business meals still appear to be 50 percent deductible.
Brant cautioned that many of the provisions of the new law that benefit construction companies and other business sectors are temporary and expire in 2025, unless Congress acts to extend them. Among the temporary provisions is 100 percent cost-recovery expensing and the reduction in the individual federal tax rate from 39.6 percent to 37 percent.
"There are so many moving parts to this new tax act, taxpayers have to be careful in their planning and they need to, at least on an annual basis, re-evaluate their planning because the law we have this year may not be here next year, at least not after 2025," he said.
And, while it was hoped that the TCJA would simplify the tax code, it clearly does not, Brant said.
"Some of the code sections impacted by the TCJA contain several complex definitions and esoteric provisions, and are accompanied by many traps and pitfalls. While many provisions sound simple in concept, their application is anything but simple," he said. "Tax reform is all about fairness, equity and simplification. This tax act, in my opinion, is definitely not about simplification. I think our tax laws are more complex today than ever before."
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