With the recent passage of the Tax Cuts and Jobs Act, there has been a heavy focus on the drop in the corporate tax rate to 21%, while other provisions, albeit significant, have received less attention. Let’s take a closer look at three significant changes and how they may impact your business, specifically in the construction industry.
First, the new law repeals the DPAD (Section199) for tax years beginning after 2017. The DPAD formerly allowed taxpayers to deduct 9% of the lesser of the taxpayer’s (1) qualified production activities income (“QPAI”) or (2) taxable income for the year, limited to 50% of the W-2 wages paid by the taxpayer for the year. If you had been claiming the 199 deduction in recent years, don’t cry just yet, there’s a new deduction that you just might qualify for instead.
The new law provides a Qualified Business Income Deduction, or QBID (Section 199A), which allows an individual a 20% deduction for “qualified business income.” For taxpayers with taxable income above $157,500 ($315,000 for joint filers), the QBID is generally limited to the greater of (1) 50% of W-2 wages paid by the business or (2) the sum of 25% of the W-2 wages paid plus 2.5% of the unadjusted basis of acquired depreciable tangible property used in the business. Certain industries, described as “specified service trades or businesses,” are excluded from receiving the deduction and include industries such as accounting, actuarial science, financial services, law, etc. Construction businesses, which include architecture and engineering, will largely qualify for the deduction but may be subject the limitations described above.
Lastly, the new law expands the limit for the cash method of accounting. Starting in 2018, businesses with less than $25 million of gross receipts for the preceding three tax periods can now use the cash method of accounting. Additionally, qualifying businesses can now use the completed contract method for construction contracts, where they were previously required to use the percentage-of-completion method.
Some of the details contained in the Tax Cuts and Jobs Act are still being ironed out, so it is imperative to work closely with your tax professional to determine how the new law will specifically impact your business. For more information or questions about this article, please contact Kelly Koman, Tax Supervisor with McKonly & Asbury, at firstname.lastname@example.org.