3 Tax Reform Changes for Contractors to Consider
By Michael Murphy, CPA
Construction companies may see several changes when they are filing their tax returns for 2018. Here are a few of the new items which could affect your construction business:
1. If your average revenue is less than $25 million, you may qualify to be exempt from the percentage of completion method for taxes. Before the new tax law, only businesses with an average revenue less than $10 million would qualify for exemption. Percentage of completion requires you to pay tax on revenue based on how far along your projects are. It does not take into account when your expenses were paid or when you received payments.
When you are exempt from the percentage of completion method, you may qualify to use the "completed contract" method for long term contracts and pay taxes on revenue when the job is completed. This new rule can help to align your business’s tax bills with available cash.
To change your accounting method from percentage of completion to another method, you will have to file a Form 3115 and track jobs based on new method. Once that is done, your accounting method is changed moving forward. Keep in mind that once your revenue increases to above $25 million average, you will be required to move back onto the percentage of completion method again. Consult your tax advisor as to whether changing accounting methods is advisable in your situation.
2. Section 179 and bonus depreciation allowed have increased. For 2018, allowable Section 179 deduction has increased to $1 million and does not start to be phased out until purchases exceed $2.5 million. You have probably used this deduction in the past to purchase new equipment and vehicles. The law has also expanded to allow for certain qualified improvement property (such as certain improvements made to the interior of a building), which in previous years were considered unqualified for IRC179. Consult your tax advisor if you are curious whether certain equipment or improvements will qualify for this deduction under the new rules.
Likewise, bonus depreciation has expanded to allow for the full deduction of eligible assets until the year 2022. Using these new bonus depreciation rules could be better than using Section 179 as you can often use bonus depreciation even if your company has a loss. Section 179 deductions cannot be taken if the company has an overall net loss. However, not all states conform with the federal treatment of bonus depreciation, so there can be larger federal to state tax differences when using bonus depreciation.
3. DPAD (Domestic Production Activities Deduction) is no longer applicable. Prior to 2018, your construction business should most likely have been receiving a 9% deduction on qualifying construction income that was earned within the United States. However, this deduction is gone beginning in 2018. You may still want to review your 2017 tax returns and see if you have been taking advantage of this deduction, and if you have not, consider whether it is advisable to amend your returns and take advantage of it. If your construction company is a partnership or S Corporation, DPAD deductions would show up on your personal 1040 tax return on line 35.
There are several other very significant changes to the tax code which apply to all businesses and individuals. To learn more about these changes, visit our resources page.