5. State and local tax deduction
A very impactful change included
in the final bill is the limiting of the
deduction available to individuals for
sales, income, or property taxes paid
to state or local tax authority to
$10,000 ($5,000 for a married tax-
payer filing a separate return) for tax
years beginning after Dec. 31, 2017
and beginning before Jan. 1, 2026.

This limitation does not apply to
property taxes paid or accrued in
connection with carrying on a trade
or business.

The limitation does not apply to
state and local taxes of businesses
taxed as a ‘C’ corporation.

The bill specifically includes a pro-
vision that disallows a 2017 deduc-
tion for prepaying state or local
income tax for a taxable year begin-
ning after Dec. 31, 2017. Any amount
paid in a taxable year beginning be-
fore Jan. 1, 2018 shall be treated as
being paid on the last day of the tax
year for which the tax applies.

6. Depreciation changes
The bill includes a provision that
allows for 100 percent expensing
through bonus depreciation of cer-
tain business assets placed in serv-
ice after Sept. 27, 2017 through Dec.

31, 2022. The amount of bonus de-
preciation allowed is then phased-
down over four years as follows
starting: 80 percent in 2023, 60 per-
cent in 2024, 40 percent in 2025, and
20 percent in 2026. The requirement
that the property be new was also
removed and replaced with a re-
quirement that the property simply
be new to the taxpayer – an impact-
ful distinction.

The bill includes some additional
changes that have the potential to
benefit many contractors. For exam-
ple, Section 179 expensing limits will
be increased to $1 million with the
phase-out threshold being increased
to $2.5 million with both thresholds
subject to inflation increases for tax
years beginning after Dec. 31, 2017.

Furthermore, the definition of quali-
fied property is expanded to include
improvements to non-residential real
property including roofs, heating,
ventilation, and air-conditioning prop-
10 – MARCH 2018 — Florida Construction News
erty, fire protection and alarm sys-
tems, and security systems if placed
in service after the date such real
property was first placed in service.

7. Interest expense deduction
limitation The bill also includes a provision
that limits the deduction for interest
expense incurred by a trade or busi-
ness to the sum of business interest
income, floor plan financing interest
and 30 percent of the adjusted tax-
able income of a taxpayer for the
year. For tax years beginning before
Jan. 1, 2022, adjusted taxable in-
come will be computed without re-
gard to depreciation, amortization, or
depletion expense. Adjusted taxable
income is otherwise generally de-
fined as a taxpayer’s taxable income
without regard to any income, gain,
deduction or loss not properly alloca-
ble to the trade or business, any
business interest expense or busi-
ness interest income and any net op-
erating loss.

Real property trades or busi-
nesses, including rental property ac-
tivities that qualify as a trade or
business, may elect out of the inter-
est deduction limitation if that trade
or business uses the alternative de-
preciation system, which generally
results in longer, slower depreciation
deductions. Any interest not de-
ductible for any tax year shall be car-
ried forward indefinitely and treated
as business interest paid or accrued
in the succeeding tax year.

An exemption to these rules ap-
plies to taxpayers with average an-
nual gross receipts for the prior three
tax years of less than $25 million.

8. Domestic Production Activities
Deduction (DPAD) repealed
For tax years beginning after Dec.

31, 2017, DPAD (also known as Sec-
tion 199) is repealed. DPAD was a
deduction allowed under pre-act
rules that allowed contractors per-
forming new construction or sub-
stantial renovation in the U.S. to
claim a deduction of up to nine per-
cent of taxable income (with certain
limitations). 9. Like-kind exchanges
Under the new law, like-kind ex-
changes are limited to only ex-
changes involving real property that
is not primarily held for sale. This
new limitation applies to exchanges
completed after Dec. 31, 2017; how-
ever, a transition rule allows like-kind
exchange treatment for any property
disposed of in an exchange on or be-
fore Dec. 31, 2017, or for any prop-
erty received by a taxpayer in an
exchange on or before the same
date. This exception generally allows
for like-kind exchanges already in
process to still take advantage of the
current like-kind exchange rules. This
may have an impact to contractors
who have typically exchanged equip-
ment and machinery in the past.

10.Estate and gift taxes and
generation-skipping transfer tax
The law doubles the base estate
and gift tax unified credit exclusion
to $10 million, effective for dece-
dents dying and gifts made after
2017 and before 2026. The bill also
increases the GST exemption to $10
million. This effectively increases the
inflation-adjusted exclusion and ex-
emption amounts to $11.2 million
($22.4 million for a married couple)
for 2018.

These increased exclusion and ex-
emption amounts will provide plan-
ning opportunities for contractors
looking to transition their estate in
the coming years.

In conclusion . . .

As there are far more elements to
the tax reform than covered here,
contractors may consider familiariz-
ing themselves with the finer details
of the changes. Looping in your
trusted advisor and CPA is strongly
recommended to ensure you are pre-
pared for the oncoming effects –
both favorable and complex – to your
financial posture.

Sarah Windham is a partner at the
Dixon Hughes Goodman LLP (DHG)
office in Charleston, SC.

She can be reached at
(843) 727-3708 or by email at
sarah.windham@dhgllp.com.