Spring 2018 issue of Horizons

Pass-Through 20% Deduction The tax reform bill increased tax relief for pass-through entities creating up to a 20% deduction of income from a qualifying pass-through. Beginning in 2018, the 20% deduction includes construction, homebuilding, engineering and architectural firms, but does not include other service-based businesses where the principal asset is the reputation or skill of one or more employees or owners. Overall, the 20% deduction is computed based on the entity’s income and is limited to the greater of either 50% of the company’s W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted depreciable basis of the qualifying property. This new deduction could reduce the effective federal tax rate of pass-through income to 29.6%. Planning Item: If a company doesn’t expect to receive the full 20% deduction due to having minimal W-2 wages, then careful planning should be performed before the end of the 2018 tax year to maximize the deduction. Capital Expensing All construction firms will see an immediate tax benefit due to the expanded rules to bonus depreciation and section 179 expensing. For both new and used assets placed in service after September 27, 2017, taxpayers will be able to elect 100% bonus depreciation. Bonus depreciation is not subject to taxable income limitation and an investment limitation.

The annual maximum amount that can be expensed under section 179 has been increased to $1 million. The $1 million limit is reduced dollar-for-dollar to the extent the total cost of section 179 property placed in service exceeds $2.5 million and the section 179 expense cannot generate a taxable loss. Caution: If an asset had a written binding contract in place as of September 27, 2017, then the asset is subject to the original bonus rules: 50% in 2017 is available only on new assets. Entertainment and Meal Expenses The cost of entertainment and employer- provided meals increased due to the tax reform bill. Starting in 2018, entertainment expenses are now 100% non-deductible. Entertainment expenses are typically any activities related to amusement, recreation and sporting events. providing food and beverages to employees through an eating facility or meals on the premises of the employer. Under the prior tax law, employer-provided meals on the premises of the employer were 100% deductible and entertainment expenses were 50% deductible. Interest Expense Limitation The new tax reform bill potentially limits the deduction of interest expense. Construction and homebuilding firms with significant debt on the books are limited to deducting interest up to 30% of the business’s adjusted taxable income beginning in 2018. There is also a new 50% limitation for employer expenses associated with

22 New Tax Law has Direct, Positive Impact on the Construction Industry