What contractors need to know about the tax act
- Construction companies will be able to share in many of the benefits of December 2017's Tax Cuts and Jobs Act, but they also need to know about some changes that could negatively impact their bottom lines, according to Crain's Cleveland Business.
- A reduction of the corporate tax rate from 35% to 21% will add more money to the pockets of those contractors set up as "C corporations," but those construction companies organized as "pass-through" entities — such as limited liability companies or Subchapter S corporations — will also get an extra financial boost starting this tax year. Members and shareholders, respectively, of those companies will be able to deduct 20% of the business's income from their personal tax returns as long as their total taxable income, whether filing individually or with a spouse, doesn't exceed a certain amount. As the Internal Revenue Service clarifies rules around the 20% deduction, there could be additional guidelines that translate to more — or less — cash at the end of the year. Another plus is that the new tax legislation's depreciation measures permit 100% cost recovery in the year of acquisition for equipment purchases made before 2023.
- A negative for contractors with average gross receipts of $25 million or more is a cap on interest expense, at 30% of the company's federal adjusted gross income. In addition, deductions for net operating losses now cannot exceed 80% of taxable income and cannot be carried back to previous years. The nine percent domestic production activities deduction has also been eliminated. Audit activity for partnerships and limited liability companies could also increase as measures meant to increase revenue from those entities go into effect this year.
The general sentiment in the industry seems to be that the new corporate tax rate and the 20% deduction for owners of pass-through companies will let businesses reinvest more into expanding their operations.
But some contractors will be paying more at the local level as some cities have turned to construction companies and developers to fund their affordable housing initiatives. The Philadelphia City Council recently passed the 1% Construction Impact Tax, a levy on building permit cost estimates. The tax is expected to generate $22 million for a down payment and closing cost assistance fund.
Los Angeles has some of the priciest real estate in the U.S., and city officials have decided to impose a "linkage fee" of $8 per square foot to $15 per square foot on new homes and apartments. The revenue will go toward affordable housing, but the fee is expected to add $15,000 to the cost of a 1,000-square foot apartment in some of the city's more expensive neighborhoods.
- Crain's Cleveland Business Tax Tips: What tax reform means for construction industry
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