The Tax Cuts and Jobs Act passed on December 20 of last year was the first major tax reform bill to be passed since 1968. Many provisions have an impact if you’re in the construction industry.
Don’t leave anything on the table. Words of wisdom for Wall Street wizards and contractors alike. When it comes to the IRS and tax deductions, contractors might be walking away from unused opportunities to reduce their tax liabilities.
The Tax Cuts and Jobs Act passed on December 20 of last year was the first major tax reform bill to be passed since 1968. There are many provisions that have an impact if you’re in the construction industry. Here are some highlights, as well as some overlook deductions.
Tax reform highlights for construction contractors
- If you’re a developer, home builder, or construction contracting company under a C corporation, your tax rate decreased from 35% to 21%.
- The 9% deduction allowed on net income for construction activities in the United States has been repealed.
- If you operate as a sole proprietorship or an S corporation you now may deduct 20% of qualified business income. This includes income from construction activities, architectural, and engineering services.
- If you had gross receipts of up to $10 million, you previously were able to postpone taxation on income from contracts that weren’t completed in the taxable year. Companies with revenue above $10 million had to use percentage of completion tables. The $10 million threshold was increased to $25 million.
- The new tax law changes the way certain property and equipment purchases can be depreciated.
- Businesses are now subject to a dis allowance of a deduction for interest expense more than 30% of their adjusted taxable income.
- Contractors organized as pass-through entities allow the owner to pay tax on the company’s income at their personal rate. The maximum pass-through tax rate was lowered from 39.6% to 29.6%.
Often overlooked tax deductions
- Rely on your tax advisor for the best answer, but remember that in most cases your industry offers multiple methods of accounting – more than most other taxpayers. Rules and regulations will determine which one best applies – but you often have the option of the cash method, the accrual method, the modified accrual method, the completed contract method, or the percentage of completion method. And, remember that this last method has a new threshold that’s $15 million more than previously.
- Construction equipment is expensive, so be sure to use all appropriate forms of depreciation available. That includes accelerated and bonus depreciation, as well as treatment of idle equipment.
- Sales tax laws can offer you significant sales and use tax savings, but you must have a clear understanding of the exemptions available – especially to contractors.
- Home builders, developers, and construction contractors are often eligible for federal and state tax credits, ranging from fuel and research to employment. Utilizing these credits can improve your cash flow management.
- Did you know that pension plans can lower your prevailing wage costs? It can also help you save on payroll taxes.
- The definition of residential or home construction has been broadened under the new tax reform laws. Beware of what are known as “look-back” regulations that may force contractors to pay interest to the IRS on jobs in progress that become more profitable than originally projected.
We know the changes can be confusing, but we are here to help you through the process. To find out more about how we help home builders, contact us today.
