Tax year 2018 has wrapped up, and tax return filing season has begun. This is the first year the new tax laws put into place in December 2017 took effect. There are several items that could affect construction contractors, the following is just a few:
- Cash basis eligibility – In the past, if average gross receipts for the prior three years fell above $10 million, an entity was required to report income on an accrual basis. Now, if average gross receipts fall below $25 million an entity can report income on a cash basis. This is a great opportunity to defer picking up and paying taxes on income that is sitting in your accounts receivable balance.
- Reporting of long-term contracts – Many contractors are required to report income on a Percentage-of-Completion method of accounting, meaning they are required to pick up and pay tax on a percentage of income from jobs currently in process. This threshold has also been increased to $25 million. If average gross receipts for the prior three years fall below $25 million, an entity can now report income on the Completed Contract Method. This means that tax does not have to be paid on a project until the year it is complete. This is another great opportunity to defer income into the following year.
- Flow-through entity 20 percent deduction – S corporations and partnerships are considered flow-through entities for tax reporting. These entities have been given a deduction on all qualified business income that will reduce taxable income from the entity up to 20 percent, requiring tax to be paid only on the remaining 80 percent. There are certain thresholds and limitations to meet the full 20 percent, please consult your tax advisor to be sure you are taking advantage of the greatest deduction available.
- Corporate tax rate of 21 percent - With the change of the corporate tax rate to 21 percent, many taxpayers should reconsider their flow entity and if it makes sense to switch their entity type. There are complex tax rules to convert an entity and other “non-tax” issues to consider before switching. Consulting with your CPA advisor and having a discussion is a must.
Other changes to note includes updates to:
- Deductibility of meals & entertainment
- Limitations on interest expense
- New partnership representative responsibilities
The recently passed tax act is the most significant tax reform since 1986! For all reasons above, speak with your UHY tax advisor to be sure you are in accordance with the new law and taking full advantage of tax savings available to you.