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Tax Tips: What tax reform means for the construction industry

Updated: Mar 31, 2022

Construction contractors have many tax reform measures to evaluate as they work to stay compliant with the law and minimize tax exposure. Congress passed the Tax Cuts and Jobs Act in December, of course, while additional developments are brewing in Ohio with the commercial activity tax (or "CAT"), the municipal income tax and the sales and use tax. Here we take a look at how recent tax law changes affect construction contractors and discuss strategies to maximize tax savings and limit compliance costs and risks.

The Tax Cuts and Jobs Act

Many business owners in the construction industry are still trying to determine what exactly federal tax reform means for them. One thing that we can expect is that most contractors will receive a tax savings in one form or another. The Tax Cuts and Jobs Act, or TCJA, lowers the corporate tax rate to a flat 21% rate. Contractors organized as flow-through entities such as limited liability companies or S corporations will see a new deduction of up to 20% of their business income. Another new benefit under the TCJA is bonus depreciation measures that allow for 100% cost recovery in the year of acquisition for equipment acquired prior to 2023.

But the bitter comes with the sweet, as other provisions in the TCJA may increase taxes.

Interest expense is now capped at 30% of the company's federal adjusted gross income, but an exception applies if a company's average gross receipts are under $25 million. Net operating losses are now limited to 80% of taxable income and may not be carried back to prior years. The TCJA also eliminates the domestic production activities deduction, which previously allowed a 9% deduction for certain income generated through construction activity.

We all hope that federal tax reform will generate tax savings to spur investment and create economic opportunities. As tax advisers are busy crunching the numbers, we are also hopeful that the IRS will soon provide regulatory guidance to shed light on complex provisions of the new law. Businesses weighing their options as to their choice of entity, for example, anticipate federal regulations to clarify to what extent they qualify for the new 20% deduction for flow-through entities.

Audit risk and exposure

While the