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Top Opportunities for Construction Companies to Pursue Following Federal Tax Reform

PHILLIP ROSS, CPA, CGMA, PARTNER & CONSTRUCTION INDUSTRY GROUP LEADER – ANCHIN, BLOCK & ANCHIN LLP

While the Tax Cuts and Jobs Act of 2017 (TCJA) will have a significant impact on all businesses, construction companies in particular are in a strong position to potentially benefit from the recently passed federal reforms. Companies within this highly competitive industry need to be proactive and strategically plan for their future to address project cycles, cash flow, financing, bonding and operational issues unique to each company.

There are tremendous tax planning opportunities as a result of TCJA for construction companies and their owners who have not filed 2017 returns, as well as major considerations that will impact how their tax picture unfolds for 2018.

Some of the top opportunities for construction companies to consider include:

  • Beginning in 2018, the average annual gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts will increase from $10 million to $25 million for contracts entered into beginning in 2018. Businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible method).
  • Under prior law, net taxable income from pass-through business entities (such as sole proprietorships, partnerships, S corporations and LLCs) was simply passed through to owners. It was then taxed at the owner’s tax rates. For tax years beginning in 2018, construction company owners could be eligible for a new 20 percent deduction based on their qualified business income. Certain items still need to be defined around the types of work that would qualify and companies where their principal asset is the skill and reputation of its owners.
  • The management of cash flows can often be difficult to account for and strategize around for construction companies. Under prior law, taxpayers had several requirements and limitations related to the use of the cash method of accounting. Many of these limitations have been loosened or removed for companies with more than $25 million in taxable income under TCJA, resulting in a major potential benefit for those companies.
  • Construction companies who are C-Corps will benefit from the tax rates being lowered to 21 percent from 35 percent; and will also benefit from the repeal of the corporate alternative minimum tax (AMT), allowing corporations to continue to use prior year minimum tax credits to offset their regular tax liability. These changes have many companies considering what business structure would be most beneficial for them.
  • The research and development tax credit – which is typically underutilized by Construction companies – was explicitly preserved in the final TCJA legislation. Many firms would qualify for the benefit and with the changes in the AMT, more firms could be eligible to leverage the credit. Furthermore, the 179D “Green” Deduction was extended retroactively for 2017 by Bipartisan Budget Act of 2018, adding additional potential incentives.

Along with these opportunities, the federal government is expected to provide additional clarification on several aspects of the tax law that could impact construction companies beyond the initial analysis.

For example, qualified business income does not include compensation paid to an owner for services rendered to the business, or any guaranteed payments to a partner or LLC member. Those compensation levels may be reassessed to maximize the qualified business deduction for profitable pass-through entities.

Furthermore, as part of TCJA, significant limitations have been applied to meals and entertainment deductions. Under prior law, businesses could deduct 50% of expenses paid or incurred for meals and entertainment directly related to the active conduct of the business.

Under TCJA, no deduction is allowed for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above. Only the deduction for 50% of food and beverage expenses associated with operating a trade or business generally is retained.

TCJA does enlarge this deduction to include providing meals to employees through an eating facility that meets the requirements for a de minimis fringe and for the convenience of the employer, which would sunset after December 31, 2025. What does this all mean for construction companies? These changes will make entertainment significantly more expensive for companies, potentially changing their approach to these activities.

It is essential for construction companies to analyze, plan, and strategize for the impact of TCJA on their business. Whether you are trying to leverage tax saving opportunities or strategizing your approach for some of the potential challenges, planning is important. We believe decisions construction companies make now for their 2017 and 2018 tax returns will have tremendous impact on their firms moving forward.

About the Author

Phillip Ross, CPA, CGMA, is an accounting and audit partner at Anchin, Block & Anchin LLP, the largest single-office public accounting firm in North America. He serves as leader of the firm’s Architecture, Engineering and Construction Industry Group. To contact Phil, please click here or call 212-840-3456. For more information on Anchin, please visit our website, www.anchin.com.