Contractors are constantly juggling project timelines, worker safety and health, materials and supplies acquisitions, and countless other duties. Contending with the daily stresses of your contracting business can push you to your limit, so staying on top of your legal obligations can feel like an impossibility. Fortunately, the Miami construction attorneys at Cotney Construction Law can assist you with all of your construction-related legal needs including contract review and drafting, employment law, license defense, bond law, dispute resolution, and more.
In part one of this three-part series, our Miami construction attorneys discussed some of the pros and cons of the Tax Cuts and Jobs Act of 2017 (TCJA) and its new deductions for pass-through entities. Now, we will discuss the effect of the bonus depreciation increase and limits on business deductions that resulted from TCJA.
Bonus Depreciation Increase
TCJA resulted in a significant increase to the Section 179 bonus depreciation. Formerly, this bonus depreciation was 50 percent, but now it has been doubled to 100 percent. The revisions to Section 179 gives taxpayers the leeway to expense the cost of any qualified property that is purchased and placed into service during the same tax year.
What does this mean for the contractors? For starters, purchases like machinery and equipment can now be expensed immediately for up to $1 million. Once the cost exceeds $2.5 million, it can be phased out. Another important change is that you no longer need to be the original user for property to acquire this bonus. The only restriction is that the previous user must be an unrelated entity.
This is another aspect of TCJA that should benefit contractors and construction businesses as they can purchase leasehold improvement property, retail improvement property, restaurant property, new or used equipment, and other forms of qualifying property, then benefit from the bonus depreciation increase.
Limits on Business Interest Deductions
Another important modification introduced by TCJA includes an alteration to the rules governing the deductibility of interest expense. Here is a quick breakdown of what changed:
- Newly proposed limits on business interest deductions are calculated by adding up business interest income, 30 percent of the company’s taxable income (post adjustment), and business floor plan financing interest.
- Interest that is not allowable as a deduction can be pushed forward perpetually.
- “Adjusted taxable income” is calculated without considering deductions resulting from depreciation, amortization, or depletion for any years before 2022.
- This is bad news for contractors who rely on lenders to finance projects.
To learn more about the effects of TCJA legislation, read part three.
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.