Among the many changes that the 2017 Tax Cuts and Jobs Act ushered in, there are several provisions that are likely to benefit construction-related businesses. On the other hand, at least one change is likely to disappoint many contractors, while several other provisions that are important to the industry remain essentially unchanged.
Good News—Expensing and Depreciation Provisions
Two changes that are likely to appeal to many construction companies involve the expansion of Section 179 equipment expensing and bonus depreciation.
Section 179 allows a taxpayer to immediately deduct the cost of purchasing qualifying property—such as new or used construction equipment and vehicles—in the year the property is acquired, rather than capitalizing and depreciating it over a period of years. The new tax law increased the maximum amount that can be expensed under Section 179 to $1 million and expanded the definition of qualifying property to include roofs, HVAC equipment, and fire alarm and security systems in certain buildings.
The Section 179 deduction begins phasing out on a dollar-for-dollar basis once a business spends more than a certain amount. The new law raises that amount to $2.5 million.
Like Section 179, bonus depreciation also allows companies to immediately deduct a portion of the cost of qualifying property. But there is no spending cap, which makes it particularly advantageous for large businesses that exceed the Section 179 limits.
The new tax law temporarily increases the bonus depreciation deduction from 50 percent to 100 percent and expands the definition of qualifying property to include used property. Note, however, that bonus depreciation begins to phase out after 2022 and is eliminated after 2027.
Another provision of interest to many contractors involves the choice of accounting methods. Under the new law, small contractors with less than $25 million in gross receipts might be permitted to choose the cash method of accounting rather than the accrual method. Some also could choose something other than the percentage-of-completion method to account for revenue from long-term contracts.
These choices could simplify small contractors’ tax preparation, but they need to be considered within the context of other provisions, such as compliance with the revised personal Alternative Minimum Tax (AMT) requirements.
The Not So Good News—Elimination of the DPAD
One disappointment in the new law for the construction industry is the elimination of the Domestic Production Activities Deduction (DPAD). Under Section 199 of the Internal Revenue Code, the DPAD allowed businesses to deduct a portion of the income they generated from certain domestic production activities including qualifying construction-related income.
Broadly speaking, many new U.S. construction projects qualified for the DPAD, as did many renovation projects. In some cases, the deduction amounted to as much as 9 percent of the qualified income, so its elimination is a letdown for many contractors.
Despite that disappointment, however, the Tax Cuts and Jobs Act did leave several popular construction-related tax credits unchanged. One such credit, the Work Opportunity Tax Credit, is offered to employers that hire individuals from nine target groups who traditionally face significant employment barriers. The credit could reduce a company’s federal income tax liability by $1,200 to $9,600 for each eligible employee, depending on the employee’s pay and hours worked.
Other tax credits that survived the tax overhaul include the Research and Development Tax Credit, the Low-Income Housing Credit, and the New Markets Tax Credit.