What Tax Reform Means for the Construction Industry: Digging through the “Tax Cut and Jobs Act”

by Megan Hiles
A photo of an excavator digging a trench for a pipeline.

The “Tax Cut and Jobs Act” that was signed into law December 22, 2017 will affect many industries beginning January 1, 2018. This has been the biggest reform to the tax code in over 30 years and this article will focus on how those recent tax reform changes will affect the construction industry.

The first major change of the tax reform that has everyone talking is the tax rate change.  Corporations will now be taxed at a flat 21% whereas, under old law, used to be taxed at a progressive rate up to 35%. This has many of our clients asking if they should become a C corporation instead of a flow through entity. However, corporations are not the only entities affected by the changes of the recent tax reform. Individuals of flow through entities can now receive a 20% deduction of qualified business income on their taxes which will be fully phased out at $415K for married filling joint.

Capital expenditures are a big part of the construction industry. The recent tax reform has changed the way businesses are able to deduct these purchases. As of 9/27/2017 but before 1/1/2023 any new or used purchases are eligible for 100% bonus depreciation. Beginning 1/1/2018 the section 179 deduction limitation will increase to $1 million with phase outs starting at $2.5 million. Under current law these section 179 limits are at $500,000 with phase out starting at $2 million.

Under the old tax law, the threshold for required use of the percentage of completion for long term contracts began at $10 million. Now under the new tax reform the limit has increased to $25 million for required use of the percentage of completion method. This increase allows for a greater amount of small businesses to defer income into future years.

If you are in the construction industry and want to know more about how tax reform may affect you, please reach out to our construction team who can answer any questions and walk you through a C Corporation vs. S Corporation comparison.