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On Dec. 22, 2017, President Trump signed the Tax Cuts and Jobs Act (H.R. 1, Pub. L. No. 115-97) (TCJA), which resulted in the most comprehensive update to the Internal Revenue Code in more than 30 years. The primary goals of the new tax reform are multifaceted, including tax relief for middle-class families, simplifying tax reporting and compliance requirements, tax relief for businesses (especially small businesses) and eliminating special-interest tax breaks and loopholes.

Of primary interest are the numerous tax incentives aimed at businesses in the construction industry. Below is an overview of these salient tax law changes, of which construction businesses should consider taking advantage.

C Corporation Income Tax Rate Reduction to 21 Percent

Previously, corporate income tax was subject to a graduated corporate tax rate structure with the top rate reaching 35 percent. Now, corporate taxable income is taxed at a 21 percent flat rate for C corporations.

Depreciation Changes

To encourage capital investment in machinery and equipment, the TCJA made sweeping changes to the depreciation rules. First, additional first year/bonus depreciation is now allowed for 100 percent of the cost, or adjusted basis of qualifying property acquired after Sept. 27, 2017. This bonus depreciation begins to phase down for years after 2022; therefore, CapX purchases should be made before then. Second, used property now qualifies for depreciation deductions. Third, improvements to the interior portion of nonresidential real estate now qualify for a 15-year recovery period (instead of 39 years). Fourth, annual caps on depreciation of passenger vehicles have been raised. Fifth, residential rental property now qualifies for a shortened 30-year alternative depreciation system recovery period.

Expensing of Depreciable Assets

Under IRC Sec. 179, businesses may elect to expense (or deduct) the cost of certain qualifying property in one tax year rather than recovering the costs through multiyear depreciation deductions subject to certain limitations (i.e., a $500,000 Section 179 expense for up to $2 million of property placed into service). The TCJA significantly increases these limits to a $1 million Section 179 expense for up to $2.5 million of assets placed into service. In addition, there is an expansion for certain real property for roofs, built-in heating, HVAC property, fire protection and alarm systems that can now be expensed under Section 179.

Business Interest Limitation

The TCJA adds a significant change to the traditional deduction for business interest that is paid to finance business operations. After 2017, the deduction for business interest is limited to the sum of business interest income, 30 percent of adjusted taxable income and the taxpayer’s floor plan financing interest. Interest paid on business debts that is not deductible due to the new limitation carries forward indefinitely with certain restrictions for pass-through entities. It is important to note that these new limits do not apply for businesses with average annual gross receipts of $25 million or less.

Net Operating Losses (NOL)

Businesses are no longer allowed to carry back a NOL two years and carry forward a NOL 20 years to offset taxable income in such years. Now, an NOL is permitted to be carried forward indefinitely, but only 80 percent of taxable income can be reduced by the NOL.

Corporate Alternative Minimum Tax (AMT)

The TCJA permanently repeals the corporate AMT for corporations in a welcomed effort to simplify tax compliance. When preparing tax returns, businesses no longer need to prepare a second tax calculation known as the AMT that disallowed certain tax incentives and allowances permitted under the regular tax system.

There are many complexities associated with these new business tax law changes, and some provisions are set to sunset (or expire) after 2025. As such, it is highly recommended that contractors consult with a tax attorney about any questions regarding the impact the new tax reform has on a construction business.

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