Webinar Slides: Tax Reform and the Effect on the Construction Industry

1Questions? Email cbizmhmwebinars@cbiz.com
CBIZ & MHM
Executive Education Series™
Tax Reform and the Effect on the
Construction Industry
Cord Armstrong
February 7, 2018

About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

Before We Get Started…
• Original Broadcast - Use the control panel on
the right side of your screen to:
• Change your audio mode
• Submit questions
• Download handouts
• Rebroadcast:
• Listen through your computer
• Email questions to
cbizmhmwebinars@cbiz.com
• Click blue handouts icon
• If you need technical assistance:
• Call support at 877-582-7011
• Email us at cbizmhmwebinars@cbiz.com
Original Broadcast:

CPE Credit
This webinar is eligible for CPE
credit. To receive credit, you will
need to answer polling
questions throughout the
webinar.
External participants will receive
their CPE certificates via email
within 15 business days of the
webinar.

Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

Presenter
Cord Armstrong is a Managing Director in the company’s tax
division. His involvement spans all aspects of Federal and State
taxation, including compliance, planning and research for businesses
and high net worth individuals.
Cord has more than 25 years of experience in public accounting. He
specializes in federal and state tax compliance, planning and
consulting for C corporations, S corporations, partnerships and LLC’s
and their owners with an emphasis in the construction industry and
is a member of the firm’s National Construction Industry Practice
Group. He also has represented corporate and individual clients
before the Internal Revenue Service and other state and local tax
authorities.
602.264.6835 • carmstrong@cbiz.com
Cord Armstrong, CPA, CCIFP
Managing Director

Agenda
Reduction in Tax Rates – Corporations and Individuals
02
01
03
04
$25 Million Threshold (Long-Term Contracts Cash & Inventory)
Expensing Rules for Capital Expenditures
Business Deductions, Losses and Deferrals

Reduction in Corporate Tax Rates
Top corporate rate drops to 21% from 35%
Effective for “taxable years beginning after 12/31/17”
Blended rate for fiscal year taxpayers-IRC Sec. 15
Example:
 Corporation with June 30, 2018 year end with taxable
income of $10,000,000
 2017 rate calculation: ($10,000,000 X 35%) X (184/365) =
$1,764,384
 2018 rate calculation: ($10,000,000 X 21% X (181/365) =
$1,041,370
 Tax for June 30, 2018 ($1,764,384 + $1,041,370) = $2,805,754
 Effective Tax Rate: ($2,805,754/$10,000,000) = 28.06%

Reduction in Individual Tax Rates
 The top individual tax rates were decreased from 39.6% to 37%
for years after December 31, 2017 through 2025
 The brackets of when the top rate kicks in were also increased
from $418,400 ($470,700 MFJ) to $500,000 ($600,000 MFJ)
 The capital gain rates are retained at either 0 percent, 15
percent and 20 percent depending on the overall level of taxable
income based on the pre-Act breakpoints indexed for inflation
 15% capital gain threshold is $38,600 ($77,200 MFJ)
 20% capital gain threshold is $425,000 ($479,000)
 The 3.8% net investment income tax and 0.9% additional
Medicare tax were left intact

Alternative Minimum Tax
Corporate AMT is repealed
 Any remaining minimum tax credits (MTC) will offset
regular tax liabilities
 50 percent of the MTC is refundable for tax years
beginning after 2017 and before 2021 and 100 percent
refundable for years beginning in 2021
Individual AMT remains but the exemptions amounts
and the income limits where the exemptions start to
be phased out were both significantly increased for
tax years 2018 through 2025

20 Percent Pass-Through Deduction – IRC Sec. 199A
 Beginning in 2018 the deduction is generally equal to 20 percent of
“qualified business income” (QBI) from a partnership, S corporation
or sole proprietorship (eff. rate of 29.6 percent)
 QBI is defined as the net amount of income, gain, deduction and loss
with respect to a qualified trade or business within the U.S.
 QBI does not include investment related income (e.g. capital gains or
losses, dividends and interest)
 QBI does not include reasonable compensation paid to S
shareholders or guaranteed payments paid to partners
 Overall limitation - deduction cannot exceed 20% of the excess of
taxable income over net capital gain
 If QBI is less than zero it is treated as a loss from a qualified business
in the following year

 The deduction is available to qualified trades or businesses,
and to certain nonqualified trades or businesses if the owners
meet an income exception (discussed later)
 A qualified trade or business means any trade or business
other than a “specified service trade or business” defined in
IRC Sec. 1202 (Re: Qualified Small Business Stock)
 IRC Sec 1202(e)(3)(A) – Modified by TCJA
 any trade or business involving the performance of services in the
fields of health, law, engineering, architecture, accounting,
actuarial science, performing arts, consulting, athletics, financial
services, brokerage services, or any trade or business where the
principal asset of such trade or business is the reputation or skill
of 1 or more of its employees employees or owners

Deduction is limited to the greater of
 (a) 50 percent of W-2 wages (bonuses, elective deferrals and
deferred compensation), or
 (b) 25 percent of W-2 wages plus 2.5 percent of qualified
property
W-2 wages do not include amounts that are not properly
allocable to qualified business income
W-2 wages do not seem to include wages paid to S
corporation owner-employees or guaranteed payments to
partners
W-2 wages are allocated to shareholders and partners in
the same proportion as the original deduction for such
wages

Qualifying property is defined as the unadjusted basis
of tangible property subject to depreciation
immediately after acquisition that is:
 Held by and available for use in the qualified trade or
business at the close of the year
 Property is included in this calculation each year until
its depreciation period has ended
 A special 10 year minimum depreciation period is
deemed to exist solely for this purpose even if the
MACRS period ends earlier than 10 years

20 Percent Pass-Through Deduction
Example: S corporation with one shareholder
 $7,000,000 in net qualified business income
 $2,500,000 of wages paid to employees
 $10,000,000 of unadjusted basis in equipment
 First compute the 20 percent deduction of $1,400,000 ($7
million X 20 percent), then each wage limitation
 (a) 50 percent wage limit would be $1,250,000 (50% X
$2,500,000)
 (b) wage plus property limit would be $875,000 (25% of the
$2.5 million in wages plus 2.5 % of the $10 million in
equipment)
 Because the $1,250,000 is the larger of the two wage
limitations, but smaller than 20% of qualified business
income of $1,400,000, the deduction would be limited to
$1,250,000

 Certain lower income taxpayers are exempt from the wage
limitations and the specified service trades or businesses
limitation
 Taxpayers with taxable income less than $157,500 ($315,000
MFJ) are fully exempt
 Taxable income over the threshold amounts will result in a
phase out of the exemption, with the limitations being fully
applicable for taxpayers whose income exceeds $207,500
($415,000 for joint returns)
• The amounts are indexed for inflation

C Corporation vs. S Corporation
 Due to the reduction in corporate tax rates, repeal of AMT and
the ability to deduct state income tax, there is an expectation
that some S corporations will consider converting to C
corporations
 Three factors counter this seemingly overwhelming advantage
of a C corporation
 the multiple individual rates and new brackets;
 the new deduction for pass-through income; and
 “double taxation” on funds withdrawn from the C
corporation or sale of stock

C vs S Analysis Using Top Rates

 Some businesses may benefit from operating in a C corporation form
and retaining the net after-tax proceeds in the business
 Future growth would be taxed at a 21 percent annual rate, which could
be lower than the tax rate of its owners, however
 The C corporation must take into consideration the accumulated
earnings tax, which taxes a corporation for retaining funds beyond its
reasonable needs
 Generally, a C corporation is permitted to accumulate up to $250,000 of
funds
 However, it must be able to be demonstrated that amounts retained
beyond this amount are for the reasonable needs of the business
 This may be easily done for some businesses – e.g., contractors (who
need to retain earnings for working capital, banking, bonding and surety
purposes, etc)

Other considerations
 Other benefits of a C corporation include choosing
a fiscal year end, and
 Simplified tax reporting
Deferred tax assets and liabilities must also be
considered before switching

$25 MILLION THRESHOLD (LONG-TERM
CONTRACTS, CASH & INVENTORY)

$25 Million Threshold
 Effective for tax years beginning after December 31,
2017
 Several provisions of the Act now apply a $25 million
revenue threshold (increased from $10 million)
 The revenue test is based on
 The average annual gross receipts (AAGR) for the prior
three taxable years
 Computed on an aggregated basis of all related entities
 Relationship measures are complex but generally use a 50
percent common ownership test.
 Adjusted for inflation annually after 2018 in $1 million
increments using Chained CPI-U

Small Contractor Exemption
 Exemption from Percentage Completion Method
(PCM)
 Exemption now applies where:
1) AAGR <$25 Million in the year the job starts, and
2) the contract is expected to be completed within 2 years
 These contractors are allowed to use the completed contract
method or any other permissible method which would defer
income recognition
 Effective for contracts entered into after December 31, 2017
 Change in accounting method will be treated as initiated by
the taxpayer and made with consent of the IRS and is made
on a cut-off basis (no 481(a) adjustment)

Cash Method of Accounting
 Other provisions with AAGR test are increased to
$25 million
 Use of the Cash Method of Accounting
 C corporation contractors with AAGR <$25 Million may use
 Applies to other taxpayers (other than tax shelters)
regardless of whether the purchase, production or sale of
merchandise is an income-producing factor
 S corporations and LLC’s with no inventory can still use the
cash method regardless of their income
 Change in accounting method is implemented with a
481(a) adjustment and made with the consent of the IRS

Accounting for Inventory
 Other provisions with AAGR test are increased to
$25 million
 Exemption from Uniform Capitalization rules (UNICAP),
and
 Inventory Accounting under Sec. 471
 Instead may treat inventories as non-incidental materials
and supplies
 Change in accounting method is implemented with a 481(a)
adjustment and made with the consent of the IRS

EXPENSING RULES FOR CAPITAL EXPENDITURES

100 Percent Expensing
 100 percent expensing effective for property placed in service after
September 27, 2017
 The final bill included a proposal in the House bill that the 100
percent expensing applies to used property as well as new property
 Applies to tangible property with a class life of 20 years or less
 Includes the expanded definition of 15 year qualified improvement
property – any improvement to an interior portion of a
nonresidential building after the building was placed in service and
not attributable to the enlargement or structural framework or and
elevator or escalator
 Expires after January 1, 2023 and will phase down 20 percent per
year until it’s completely phased out in 2027
• 80% for 2023
• 60% for 2024
• 40% for 2025
• 20% for 2026

Section 179 Limits Increased
The section 179 provision remains and the annual limit is
increased to $1 million
The limit begins to phase out after qualifying purchases
exceed $2.5 million
Allowed for new or used personal property and qualified
improvement property
Largely irrelevant due to 100 percent expensing, however,
certain real property improvements not eligible for 100%
expensing are eligible under section 179(f)(2), including
 Certain structural components to nonresidential buildings
including, roofs, HVAC, and fire protection and alarm
systems, and security systems

BUSINESS DEDUCTIONS, LOSSES AND DEFERRALS

Business Interest Deduction
Disallowance of net interest expense in excess of 30%
of the business’s adjusted taxable income
 Defined as taxable income computed without regard to
deductions for interest, depreciation, amortization,
depletion and net operating losses
Businesses with average annual gross receipts for the
prior three years of $25 million or less are exempt
from this limitation
Any unused interest expense is carried forward
indefinitely

Business Interest Deduction
Certain real property trades or business (defined in
IRC 469(c)(7)(C)) which includes construction and
development can make an irrevocable election out of
this limitation if they depreciate real property used in
their trade or business under the alternative
depreciation system (ADS)
 For non-residential property the ADS recovery period is 40
years vs 39
 For qualified improvement property the regular cost
recovery period is 15 years vs 20 (no bonus depreciation
would be allowed under ADS, however 179 depreciation
does apply to the ADS)

Use of Net Operating Losses
For taxable years ending after December 31, 2017 the
two-year carryback is repealed
 Calendar year taxpayers can still can still carryback losses
arising in 2017
For losses arising in tax years beginning after
December 31, 2017 the loss is carried forward
indefinitely and the deduction is limited to 80% of
taxable income
 Carryover NOL’s from tax years beginning before December
31, 2017 are not subject to the 80% limitation and will need
to be tracked separately

Limited Use of Business Losses for Non-Corporate Taxpayers
 Effective for tax years beginning after December 31, 2017 and
before January 1, 2026 “excess business losses” from an S
corporation, partnership, LLC or sole proprietorship are
currently disallowed
 Defined as the excess of the aggregate business deductions
over the sum of gross income or gain from such business plus
$500k MFJ ($250k Single)
 Disallowed losses carried forward as net operating losses
 Each partner or S shareholder takes into account their
allocable share of the loss and the limitation is applied at the
partner or shareholder level
 Limit is applied after first taking into affect the passive loss
rules

Meals and Entertainment Revisions
For amounts paid after December 31, 2017 the following
applies:
 Entertainment or recreation (e.g. golf or sporting
events) are no longer subject to the 50% limitation and
are 100% disallowed
 The 50% limitation for business meals remains so meals and
entertainment expenses will need to be recorded in separate
accounts.
 Club membership dues with respect to any club
organized for business or recreation is also non-
deductible
 In addition the provision disallows the deduction for
any qualified transportation fringe benefits paid for
employees (e.g. parking and mass transit)

Financial Statement Conformity - IRC Sec. 451
Effective for tax years beginning after December 31,
2017
Income must be recognized no later than the tax year
in which the income is taken into account on
 An applicable financial statement, or
 Under rules specified by IRS, another financial statement
Special methods of accounting are exempted,
including
 Long-term contracts under IRC 460
 Installment sales under IRC 453
 Deferral of advance payment rule remains and is codified

Financial Statement Conformity - IRC Sec. 451
 For contracts with multiple performance obligations the
transaction price must be allocated in accordance with the
allocation in the applicable financial statement
 Provision needs to be considered along with adopting ASC 606
for financial statements
 Considered to be a change in method of accounting initiated
by the taxpayer
 Not applicable to taxpayers who don’t have an applicable
financial statement or who are on the cash basis method of
accounting

Other – Construction Provisions
Tax deferred treatment of like-kind exchanges completed
after December 31, 2017 is limited to real property that is
not held primarily for sale or exchange
The Domestic Production Activities Deduction (DPAD) is
repealed for taxable years beginning after December 31,
2017
Private Activity Bonds (PAB) remain tax exempt
Work Opportunity Tax Credit (WOTC) and the New
Markets Tax Credit are retained

?
QUESTIONS

If You Enjoyed This Webcast…
Upcoming Courses:
• 2/8: Eye on Washington: Quarterly Business Tax Update
• 2/12: Tax Reform's Impact on High Net Worth Individuals
• 2/21: Tax Reform's Impact on Mergers & Acquisitions
• 2/22: The Impact of the New Tax Law on Closely Held Businesses
• 3/27: First Quarter Accounting and Financial Reporting Issues Update
Recent Publications:
• The Impact of the New Tax Law on Real Estate Investment
• How U.S. Tax Reform Affects International Tax Considerations
• How Adopting the New Revenue Recognition Guidance Could Lead to a Big Tax
Bill
• The Impact of the New Tax Law on M&A Activity
• 7 Steps to Secure Your Exit Strategy in Uncertain Times

Connect with Us
linkedin.com/company/
mayer-hoffman-mccann-p.c.
@mhm_pc
youtube.com/
mayerhoffmanmccann
slideshare.net/mhmpc
linkedin.com/company/
cbiz-mhm-llc
@cbizmhm
youtube.com/
BizTipsVideos
slideshare.net/CBIZInc
MHM CBIZ

THANK YOU
CBIZ & Mayer Hoffman McCann P.C.
cbizmhmwebinars@cbiz.com

Webinar Slides: Tax Reform and the Effect on the Construction Industry

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Webinar Slides: Tax Reform and the Effect on the Construction Industry

Similar to Webinar Slides: Tax Reform and the Effect on the Construction Industry (20)

More from MHM (Mayer Hoffman McCann P.C.)

More from MHM (Mayer Hoffman McCann P.C.) (20)

Recently uploaded

Recently uploaded (20)

Webinar Slides: Tax Reform and the Effect on the Construction Industry

Editor's Notes