For the past year, construction companies have benefited from the Tax Cuts and Jobs Act, the most significant reform to be enacted since 1986. Signed by President Donald Trump on Dec. 22, 2017, this legislation “changed deductions, depreciation, expensing, tax credits and other tax items that affect businesses.” In this article, a South FL contractor lawyer with Cotney Construction Law explains how the Tax Cuts and Jobs Act affects your business and how you can take advantage of its provisions.
Lower Tax Rates and the Pass-through Entity Deduction
Most notably, the Tax Cuts and Jobs Act lowers corporate tax rates, thereby providing much-needed tax relief for businesses. The hope is to create jobs by attracting corporations back to the U.S. who moved overseas to take advantage of lower tax rates. If your business is a C corporation, meaning that your company is taxed on its net income, you now enjoy a flat 21 percent tax rate — a significant drop from the previous tax rate of 35 percent.
S corporations, sole proprietors, or partners who qualify can now take advantage of a pass-through entity deduction of 20 percent. For qualified businesses in the maximum tax bracket of 37 percent, the maximum tax rate is reduced to a much more manageable 29.6 percent.
If you’re having trouble figuring out if your business is a C corporation or an S corporation, review your previous tax returns. C corporations file IRS Form 1120, while S corporations file IRS Form 1120S. Another indication that your company is an S corporation is if you filed IRS Form 2553.
For Small Contractors
It’s not uncommon for a construction project to take years to complete, which makes filing taxes on revenue for a single year a challenge. Large construction companies use a percentage of completion method when calculating taxes; however, this method can create cash-flow issues, especially for smaller contractors. Previously, contractors working on a project that was expected to be completed within two years, and with annual gross receipts under $10 million in the prior three years, were able to postpone taxation until project completion or final payment. This $10 million threshold prohibited many business owners from taking advantage of the exemption.
The Tax Cuts and Jobs Acts increased the $10 million threshold to $25 million. Contractors that fall within this range can now use either method for recognizing revenue, whichever benefits their business the most. The contract completion method is far more preferable as it allows contractors ample time to collect on payments. If your company ever experiences a payment dispute, our South FL contractor lawyers are standing by.
Related: Preventing Cash Flow Issues
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a mandatory tax that is triggered when taxpayers, including business owners, make more than the exemption. The AMT “applies to taxpayers with high economic income by setting a limit on those benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax.” While the AMT has been eliminated for C corporations, S corporations working on long-term contracts are subject to the AMT, requiring them to use the percentage of completion method mentioned above.
In another victory for contractors, the Tax Cuts and Jobs Act raises the exemption amounts from $123,100 (single) and $164,100 (married filing jointly) to $500,000 (single) and $1 million (married filing jointly). If your taxable income is below this threshold, the AMT does not apply to you, thereby freeing you to recognize revenue as you see fit.
Deductions for Business Assets
Contractors and construction companies regularly invest large sums of money into equipment purchases in order to keep up with growing demand in the industry. Under the Tax Cuts and Jobs Act, contractors can now take advantage of 100 percent immediate expensing (up from 50 percent) on qualified new or used equipment (cranes, heavy vehicles, office equipment, etc.) from now until Jan 1, 2023. This provision will be completely phased out by the beginning of 2027, so take advantage of it while you can.
Not all equipment qualifies for 100 percent immediate expensing; that’s what Section 179 is for. Section 179 also allows businesses to deduct the cost of new and used equipment, such as computer software, security systems, and improvements to nonresidential real property; however, it is capped at $1 million and phases out after the purchase value exceeds $2.5 million.
What’s Best for Your Business?
Established and emerging contractors need to examine the above to decide whether to file as a C corporation or an S corporation. By filing as an S corporation, you avoid the double taxation on business income, but you’re also missing out on the lower 21 percent tax rate. There are, of course, numerous other provisions in the Tax Cuts and Jobs Act that affects contractors, including changes to deductions for business interest expenses, lobbying expenses, and meal and entertainment expenses.
Related: Corporate Transaction Law
Deciphering tax law and correctly applying deductions that can benefit your business is no easy feat. Fortunately, the Broward contractor attorneys from Cotney Construction Law are here to help. With their legal expertise and dedication to the industry, our team can provide sound legal tax advice and assist your company with mergers and acquisitions, stock purchase agreements, and asset purchase agreements as well. For legal representation that can do it all, partner with the affordable, on-demand attorneys from Cotney Construction Law.
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.