Spring 2018 issue of Horizons

Corporate Tax Reform Domestic corporations will experience one of the biggest benefits of the new tax reform bill with a 14% reduction in corporate tax rates. The new tax rates are effective as of January 1, 2018. C-corporation construction firms that regularly reinvest profits back into the company could see a significant benefit due to the tax rate reduction. Shareholders receiving dividends from corporate earnings and profits remain subject to double taxation. Corporate tax reform also includes the repeal of alternative minimum tax (AMT) and an 80% annual limitation of net operating loss carryforwards. Planning Item: Careful and diligent planning as to the appropriate tax structure (C-corporation versus flow-through) for construction firms should be considered for the 2018 tax year and going forward. The advantages and disadvantages of each tax structure must be taken into account including internal and external factors affecting the business. Increased Relief for Small Taxpayers: Small Contractor Exemption The tax reform bill expanded the completed contract and cash method of reporting rules to taxpayers with less than $25 million in gross receipts from the original $10 million threshold, thus giving construction firms a large tax benefit.

The increase to $25 million is a nice opportunity for small contractors who have outgrown the original $10 million threshold. The small contractor exemption applies to taxpayers with less than $25 million in gross receipts computed on a prior three year average. Small contractors can choose any accounting method, typically either the cash or completed contract method that represents the greatest deferral of income. Percentage-of-completion should still be used for contracts expected to last more than 24 months from the date of inception. Those contractors that enter into joint venture agreements may need to aggregate gross receipts of all the applicable entities when computing the $25 million gross receipt average. For contractors switching to the completed contract method, this change is to be applied on a cut-off basis. Contracts entered into after December 31, 2017, will be computed on the completed contract method while contracts entered before January 1, 2018, must continue to use the original method of accounting, which more than likely was percentage-of-completion method. An example of the percent complete profit and tax completed contract profit recognized under the small contractor exemption can be viewed in the Completed Contract Adjustment figure below.

Completed Contract Adjustment Book Versus Tax Gross Profit

Estimated Gross Profit

Job to Date Revenue

Job to Date Costs

Job to Date Book Profit

Job to Date Tax Profit

Contract Amount

Construction Costs

Percent Complete

Contract #

001

10,000,000

8,500,000

1,500,000

5,000,000

4,250,000

50.00%

750,000

0

Caution: Unfortunately, contractors must still compute income for AMT purposes under the percentage-of-completion method, thus requiring an addback from the completed contract method for pass-through entities.

Spring 2018

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