Alabama Construction News

JUL-SEP 2018

Alabama Construction News is the states only bimonthly magazine dedicated to the commercial construction industry.

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In addition to the expanded bonus depreciation provisions, effective Jan. 1, 2018 the maximum amount a company can expense under Internal Revenue Code section 179 has been increased to $1 million—up from $500,000—and related purchasing limits have been increased from $2 million to $2.5 million. The expansion of capital expenditure expensing options creates significant planning opportunities for contractors. The potential tax cash flow savings generated by immediate expensing of qualifying capital expenditures can help contractors update their equipment fleet and support increased efficiency in operations. BUSINESS TAXES A more well-known aspect of the TCJA is the corporate rate cut, which significantly reduces the amount of taxes businesses must pay. C corporations have a flat 21 percent tax rate on taxable income, which is a significant decrease from the previous maximum rate of 35 percent. Comparatively, pass-through entities (S corporations and partnerships) with qualifying business activities (including most contractors) can qualify for a 20 percent deduction from taxable income. It is important to note that the domestic production activities deduction, which afforded most contractors a 9 percent deduction, has been repealed. The availability of the 20 percent deduction is subject to limitations, and an exhaustive recap of those limitations is too lengthy to include here. Generally speaking, if you qualified for the previous domestic activities production deduction, then you should qualify for the 20 percent pass-through deduction. INCREASED LIMITS FOR METHOD OF ACCOUNTING While contractors can use either the cash or accrual accounting method for short-term contracts, they must account for long-term contracts using the percentage of completion method (PCM). Before TCJA, construction companies with average gross receipts of $10 million or less in the preceding three years were entitled to an exception from the requirement to use the PCM method for long-term contracts as long as they met certain requirements. TCJA increased the amount of gross receipts from $10 million or less to $25 million or less. INTEREST EXPENSE The TCJA also includes limitations on certain deductions and loss treatment that do not decrease one's tax liability. The deduction for interest expense is now limited. Starting in 2018, the deduction for interest expense is limited to 30 percent of earnings before interest, taxes, depreciation and amortization. In 2022, the limitation is 30 percent of earnings before interest and taxes. Taxpayers with average gross receipts of $25 million or less are excluded from this limitation, however. In addition, various exceptions do exist for real estate, utilities, farming and certain small businesses. NET OPERATING LOSS LIMITATIONS The TCJA also includes a limitation on the carryback of net operating losses (NOL). Previously, a taxpayer that generated an NOL could carryback that loss two years to recoup tax dollars previously paid. The TCJA has eliminated the carryback ability but it now allows the carry forward of such NOLs indefinitely to offset future income and related taxes. In addition to the carryover and carryback changes, the TJCA also introduces a limitation on the amount of NOLs that a corporation may deduct in a single tax equal to the lesser of the available NOL carryover or 80 percent of a taxpayer's pre-NOL deduction taxable. LIKE-KIND EXCHANGES The TCJA has limited the taxpayer's ability to exchange like-kind assets to certain real property. Like-kind exchanges allowed taxpayers to exchange assets and defer any related gain on the exchange. While this is still the case for certain real property, it is no longer the case for any type of personal property. This may not sound like a big deal, but think about trading in heavy equipment that has been fully depreciated. The fair-market value might be a six-figure number that you now have to pick up in income and pay tax on. PLAN AHEAD The TCJA's comprehensive tax reform highlights the necessity for proactive planning. To ensure you and your business are prepared to take advantage of these changes, a proactive approach isn't just beneficial, it's essential. Now is the time to talk with your tax advisor and better understand what you can do to operate tax efficiently and continue to grow your business. For questions or additional information, contact Allen Dunn, RSM Alabama Market Managing Partner, at 205.949.2130 or ENDNOTES 1Jim Glassman, "3 Economic Impacts of the Tax Cuts and Jobs Act" (Jan. 3, 2018), JP Morgan Chase and Co. 45 JUL–SEP 2018 AL CONSTRUCTION NEWS

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