The Tax Cuts and Jobs Act of 2017 (TCJA) was drafted with a singular, but lofty, goal in mind — to reform the Internal Revenue Code. This important piece of groundbreaking legislation changed how individuals and businesses organize their entities, taxes, and business dealings. While the effect of this legislation is widespread, its effect on the construction industry has been exceptionally notable.
With any new piece of legislation, there will be opportunities and challenges. In order to observe these changes and react accordingly, it’s best to work with a Miami construction lawyer. In this three-part series, the Miami construction lawyers at Cotney Construction Law will discuss the effects TCJA legislation has had on the construction industry.
TCJA: Good or Bad for the Construction Industry?
The TCJA was designed to reform the Internal Revenue Code, which means any business owner who pays taxes will be affected in some way or another, but these effects have proven to have significant consequences on the construction industry. Some of these changes have resulted in the betterment of the construction industry, while others have negatively affected contractors and other construction professionals.
For example, the TCJA resulted in increased bonus depreciation and historic rehabilitation tax credits which are a great boon to the construction industry. On the other hand, reduced mortgage interest deductions could result in fewer contracts for contractors. Since contractors rely on loans and lines of credit to finance projects, the new limitations on business interest deductions will throw a wrench in the plans of contractors nationwide.
New Deduction for Pass-Through Entities
The 199A deduction, a byproduct of TCJA, allows pass-through entities such as partnerships, limited liability companies (LLCs), and S corporations to benefit from a deduction calculated as 20 percent of the entity’s qualified business income (QBI). According to the Internal Revenue Service (IRS), “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business.” Construction business owners will likely benefit from a reduced income tax bill due to this 20 percent deduction allowance. However, there are restrictions barring some construction business owners from utilizing the 199A deduction. For instance, all income is required to be earned in the United States. Passive income like capital gains, dividends, or interest income does not count. Additionally, specified service trades and businesses cannot take advantage of the 199A deduction since they are not counted in the QBI amount.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.