Tax Reform Basics for Masonry Contractors
Understanding how tax changes impact a mason’s bottom line.
By Timothy Hughes and Vikram Agarwal
Our airwaves are filled with news about the passage of the new federal tax law. Although there are many uncertainties in how implementing regulations and rules will look, many businesses and certain industries will significantly benefit. This article outlines some tax reform basics for masonry contractors and masonry contracting businesses.
Business and real estate highlights
Corporate tax rate reduction
The corporate tax rates are to a flat 21 percent.
Deduction for pass-through income
A new section, Code Sec. 199A, “Qualified Business Income,” will enable a non-corporate taxpayer who has qualified business income (QBI) from a partnership, S corporation, sole proprietorship, trust or estate to take a deduction of 20 percent of the QBI. There is generally a cap on the deduction amount based on 50 percent of W-2 wages, but the provision favors certain non-corporate entities owning commercial real estate because there is a more generous cap on the deduction for such entities. This may dramatically impact the construction trades, including masons, by encouraging real estate ownership, development and construction. It may also encourage construction companies to switch independent construction workers to employee status.
Net interest expense deduction limitation
Businesses with high interest expense deductions that generally have more than $25 million in gross receipts may not be able to deduct all of such interest expense. The disallowance of a deduction for net interest expense kicks in when the expense is over 30 percent of the business’s adjusted taxable income. Real property trades or businesses can elect out if they use the Alternative Depreciation System to depreciate the applicable real property. The construction industry heavily utilizes the interest deduction, so uncertainty exists about how this provision will impact the demand for construction services.
Recovery period for qualified real property shortened
Qualified improvement property placed in service after Dec. 31, 2017, should be depreciable over 15 years using the straight-line method. Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if such improvement is placed in service after the date the building was first placed in service. Qualified improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator or the internal structural framework of the building. This provision should increase the demand for renovation work.
Rehabilitation credit changes
Unfortunately, the 10 percent credit for qualified rehabilitation expenditures (QRE) of certain older buildings has been eliminated. Further, the 20 percent credit for QRE of certified historic buildings will now not be available in the year the building is placed in service. Rather, the credit will have to be taken ratably over five years. This will severely impact the market for tax equity investing. The reduction of some of these style projects may negatively impact specific tradespeople, including masons, who focus on this market segment.
Accounting for construction contracts
Generally, construction companies that have averaged less than $25 million the past three years can use the completed contract method to report income on contracts. If contracts take two years or less, this change can allow masons to receive payments in one year and report the income from the contract when the contract is completed.
Highlights specific to employers
New Credit for employer-paid family and medical leave
For the next two years, businesses can receive a credit on taxes for wages paid to qualified employees during the time the employees are on family and medical leave under the Family Medical Leave Act (FMLA). The credit is up to 25 percent of the wages paid.
Employer’s deduction for fringe benefit expenses limited
The deduction for entertainment expenses will now be eliminated as will the deduction for employee transportation fringe benefits. Further, there is now a 50 percent limitation on the deduction for meals provided through an in-house cafeteria or otherwise on the premises of the employer.
Highlights for individuals/estate planning
The exemption amount has been increased from $5 million to $10 million with the higher amount indexed for inflation starting in 2011. The exemption for a married couple in 2018 is estimated to be $22.4 million. Business owners of successful masonry contractors will greatly benefit from this increase.
In contrast, the interest on home equity indebtedness is suspended and the deductions for mortgage interest are limited to the first $750,000 or the mortgage, instead of the current $1 million.
For divorces or separation agreements executed in 2018, there will be no deduction for alimony or separate maintenance payments and no income for receiving these payments.
The voluminous and complex tax bill appears to offer overall advantages to the business community and to real estate owners and developers in particular. While we cannot predict the future, it appears these changes will help masonry contracting businesses moving forward.
Timothy R. Hughes, Esq., LEED AP, is the managing shareholder and Vikram Agarwal is a shareholder of the law firm Bean Kinney & Korman, P.C. in Arlington, Virginia. Hughes is a construction, real estate and business attorney. Agarwal is a taxation, real estate and business attorney. They may be reached at 703-525-4000, firstname.lastname@example.org or email@example.com.