CONSTRUCTION
Top 10 List of Provisions
Included in 2017 Tax Reform
By Sarah Windham
Special to Florida Construction News
The last major tax reform legisla-
tion was passed in 1986. Since then,
the tax rules – Internal Revenue Code
amendments, regulations, proce-
dural guidance and court case law –
have morphed into a complex sys-
tem for tax paying contractors. The
recently signed bill is a significant
modification to the existing system
and the consensus is clear. Most
businesses expect their income tax
expense to decrease, including con-
tractors. Though there are many moving
parts in the new tax law with the po-
tential to affect businesses and indi-
viduals to varying degrees, this
article highlights what we consider
10 of the most significant changes
for construction companies.
1. Individual tax rates and
corporate tax rates
The final bill settled on keeping
the same number of individual tax
brackets as in current existence:
seven. However, the new tax law re-
duces individual income tax rates to
10, 12, 22, 24, 32, 35 and 37 percent,
and raises the income levels subject
to each tax rate. These rates apply to
tax years beginning after Dec. 31,
2017 and beginning before Jan. 1,
2026, unless subsequently extended
by future legislation. On the corpo-
rate side, the current graduated tax
rate was removed in favor of a flat 21
percent rate for tax years beginning
after Dec. 31, 2017.
2. Increase in Small Contractor
Exemption Amount
Under prior tax law, contractors
whose average annual gross receipts
were less than $10 million were ex-
empt from using the percentage of
completion (PCM) method of ac-
counting for income tax purposes.
Under the new bill, the average an-
nual gross receipts requirement has
been increased to $25 million. This is
effective for any contracts entered
into after Dec. 31, 2017. It is impor-
tant to note that for commercial con-
tracts, percentage of completion is
still required to be used for purposes
of the alternative minimum tax
(AMT). While under the final bill AMT was
repealed for businesses taxed as a
‘C’ corporation, it was not repealed
for individuals. However, it did pro-
vide for increased individual exemp-
tions. The 2018 exemption amount
was increased from $86,200 to
$109,400 and the phase out thresh-
old increased from $164,100 to $1
million for married filing joint taxpay-
ers. The exemption amount for sin-
gle taxpayers increased from
$55,400 to $70,300 and the phase
out threshold increased from
$123,500 to $500,000.
Contractors, other than ‘C’ corpo-
rations, considering making the
switch to a method other than PCM
for 2018, will want to consider the
potential for AMT impacts before
making a final decision. If a contrac-
tor switches to a method other than
PCM for 2018, any contracts entered
into before Dec. 31, 2017, would be
taxed under the prior method of ac-
counting even if the contract contin-
ued into 2018.
3. Pass-through income deduction
Aligning with a reduced corporate
tax rate, Congress provided pass-
through entities with a deduction for
a percentage of their taxable income.
Starting in 2018, a deduction will be
allowed for taxpayers who have qual-
ified business income (QBI) from a
partnership, ‘S’ corporation, or sole
proprietorship, subject to limitations.
The 20 percent deduction is limited
to the lesser of (1) 20 percent of their
pass-through business income or (2)
the greater of (a) 50 percent of the
W-2 wages paid in the qualified trade
or business, or (b) the sum of 25 per-
cent of W-2 wages, plus 2.5 percent
of the unadjusted basis of all quali-
fied property. This deduction applies
for tax years beginning after Dec. 31,
2017 and beginning before Jan. 1,
2026. 4. Standard deduction, charitable
contributions and the Pease
Limitation Personal exemptions are removed
in the bill in favor of a higher stan-
dard deduction effective for tax years
beginning after Dec. 31, 2017 and
beginning before Jan. 1, 2026. The
new standard deduction amounts
will be $24,000 for married filing joint
or surviving spouse, $18,000 for an
unmarried individual with at least
one qualifying child, and $12,000 for
single filers.
Charitable contributions – which,
under old law, were limited to 50 per-
cent of a taxpayer’s AGI – will now
be limited to 60 percent of AGI effec-
tive for tax years beginning after
Dec. 31, 2017 and beginning before
Jan. 1, 2026. The bill will also repeal
the current 80 percent deduction for
certain contributions to universities
made in connection with athletic
seating rights.
The overall limitation on itemized
deductions referred to as the Pease
Limitation will be suspended for tax
years beginning after Dec. 31, 2017
and beginning before Jan. 1, 2026.
This limitation essentially reduced
the value of certain itemized deduc-
tions for high income taxpayers by
three percent for every dollar over
the taxable income limit. The phase-
out was capped at 80 percent of the
total value of itemized deductions.
Florida Construction News — MARCH 2018 – 9