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Tax Reform's Positive Impact on the Construction Industry

Updated: Dec 3, 2018

Congress recently passed the most significant tax reform legislation since 1986. The Tax Cuts and Jobs Act, approved in late 2017, should have a positive impact on design and construction companies, as key provisions of the legislation will converge to drive business investment, employment and wages.

Fundamental aspects of the law include:

  • It cuts the corporate tax rate from 35 percent to 21 percent. The new 21 percent flat tax rate will benefit construction companies set up as C corporations.

  • Construction companies that are pass-through entities (meaning they can include business profits on their personal tax returns, with examples including sole proprietorships, partnerships and S corporations) will get a 20 percent deduction on that income.

  • Businesses with less than $25 million of gross receipts for the preceding three tax periods can now use the cash method of accounting. Many contractors also can now use the completed contract (instead of the percentage-of-completion) method for construction contracts.

  • Private activity bond financing will retain its tax-free status, which will keep more funds flowing to the public construction sector.

After Congress passed the legislation, Associated Builders and Contractors (ABC) President and CEO Michael D. Bellaman released the statement, “The vast majority of construction companies will benefit from the new 20 percent deduction for qualified pass-through income, bringing the top effective rate to 29.6 percent, down a full 10 points. The rest will feel a boost from the largest corporate rate cut in U.S. history. Changes to various accounting methods will ease burdens for many small contractors and the doubling of the estate tax exemption to $11 million is a big win for our industry’s family businesses.”

The construction industry has been paying a higher effective tax than any other sector of the nation’s economy, according to ABC reporting on a U.S. Department of Treasury analysis.