The Tax Cuts and Jobs Act (the Act) was signed by President Trump on December 22, 2017. The changes in the Act will affect organizations in a variety of ways. The following highlights are pertinent to construction or home building companies and owners. As with past tax acts, there are likely to be “technical corrections” passed in future legislation. While technical corrections are often minor, occasionally the changes are material.
Construction Company and Homebuilder Provisions
- Accounting for long-term contracts and the cash method. The law allows companies with revenue less than $25 million to utilize the cash method of accounting for tax purposes. It also provides an exception to the requirement to use the percentage of completion method for long term contracts. The completed contract method or any other permissible exempt contract method can be used by companies with revenue under $25 million. The law will apply to contracts entered into after 2017.
- Accounting for inventory and uniform capitalization rules (UNICAP/263A). Homebuilders that have revenue of less than $25 million will not have to account for inventory for tax purposes. Homebuilders under $25 million of revenue will also be exempt from having to capitalize certain general and administrative costs to inventory for tax purposes.
- Increased depreciation expensing limits. Bonus depreciation and Section 179 depreciation are both increased under the new law.
- 100% bonus depreciation will be allowed for all asset purchases before 2023. The bonus depreciation provisions will phase out between 2023 and 2026.
- Section 179 limitations will be increased to $1 million on purchases of $2.5 million or less. The standard rules requiring active business income will remain.
- Partial exclusion of pass-through income. The Act will allow a 20% exclusion from tax of qualified income of pass-through entities, such as S-corporations, partnerships and sole-proprietorships. The exclusion will be generally limited to the lesser of 20% of qualified business income or 50% of W-3 wages paid by the entity.
- Reduction in C-Corporation tax rates. The tax rate for corporations under the Act will be 21% effective for taxable years beginning after December 31, 2017. The tax rate is currently 35%
- Repeal of the Domestic Production Activities Deduction/Section 199. Effective for tax years beginning after 2017, the law would repeal the 9% deduction for domestic production activities. Nearly every homebuilder and construction company will be impacted by this repealed deduction.
- Limitation of business interest expense. An interest deduction limitation provision generally limits the deduction of interest expense to 30% of taxable income before interest expense. There is a “small business” exception as well as a transitional rule for certain expenses. The limitation applies to tax years beginning after December 31, 2017.
- Net Operating Loss limitations. Net Operating Losses (NOL) are limited to 80% of taxable income and the Act eliminates most NOL carrybacks. New NOL’s are to be available for carryover indefinitely. The changes are effective for tax years ending after December 31, 2017.
- Entertainment Expense limitation. Entertainment expenses are further limited. Certain expenses that were 50% deductible will become 100% nondeductible. Other expenses that were fully deductible will be limited to a 50% deduction. The effective date is generally for expenses paid or incurred after December 31, 2017.
Individual tax provisions
- Tax rates for the individual income tax brackets will be reduced to a top rate of 37% compared to the current top rate of 39.6%. Since there are other changes to the tax base, especially with respect to deductions and alternative minimum tax, the degree to which the Act will result in a reduction of tax may vary greatly depending on the taxpayer. The change in rates generally apply as of January 1, 2018 and is slated to end after December 31, 2025.
- The standard deduction will be increased to $24,000 for joint filers and $12,000 for single filers beginning as of January 1, 2018 and ending after December 31, 2025.
- Personal exemptions are not allowed for tax years beginning after December 31, 2017 and before January 1, 2026.
- The home mortgage interest deduction is generally not changed for existing acquisition indebtedness. The deduction for new loans after December 31, 2017 will generally be limited to the interest on $750,000 of acquisition indebtedness. The deduction for home equity indebtedness will be suspended beginning after December 31, 2017 and before January 1, 2026. Generally, taxpayers will not be able to claim a deduction for interest on home equity indebtedness after December 31, 2017.
- The Act will increase the individual limit on annual charitable contributions as a percentage of Adjusted Gross Income (AGI). The limit will increase to 60% of AGI for cash contributions made in tax years beginning after December 31, 2017 and before January 1, 2026.
- The state and local tax deduction is capped at $10,000. Unlike earlier proposals, the $10,000 may include state income taxes or sales tax in addition to property taxes. The new provision is effective beginning for tax years after December 31, 2017 and before January 1, 2026.
- Miscellaneous itemized deductions subject to the 2% floor under current law are suspended after December 31, 2017.
- The medical expense deduction is retained with some temporary changes.
- The moving expense deduction is suspended for tax years beginning after December 31, 2017 and before January 1, 2026. Likewise, the exclusion for qualified moving expense reimbursement is suspended.
- The education savings plan rules are changed to allow payment of certain expenses up to $10,000 per year in connection with attendance of a student at a public, private or religious elementary or secondary school. The definition of eligible expenses was narrowed before the final Senate vote. This provision is effective after 2017.
- Alternative Minimum Tax (AMT) for individuals is retained but is significantly modified. The AMT exemption amounts increase by approximately 30%. More importantly, the phase out of the AMT exemptions begins at $1 million for married taxpayers filing jointly and at $500,000 for single taxpayers. These phase-out thresholds are substantially higher than current law. These Act provisions generally apply to tax years beginning after December 31, 2017 and before January 1, 2026.
- The estate tax is retained, however the amount exempt from the tax will be increased to $10 million for decedents dying after 2017 and before 2026.
If you have questions regarding changes in the Tax Cuts and Jobs Act or if you would like more information, please contact one of RubinBrown's Construction Services Group professionals.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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