By Abe Livchitz, CPA, Senior Tax Manager
ASL Construction Group
In December, the Republican led Congress enacted the most wide ranging tax reform legislation since 1986. Provisions will impact both personal and business tax liabilities beginning in 2018. The legislation contains changes that can both help and hurt a contractor’s bottom line. Significant provisions include:
- Lowers the tax rate for C-Corporations to a flat 21% tax rate.
- Lowers individual tax rates and decreases the effective tax rate on income from pass-through entities such as S-corporations, partnerships and sole proprietorships. Pass-through income can qualify for a 20% deduction so effectively only 80% of the income will be taxable.
- Repeals the 9% deduction for income generated by domestic production activities.
- Permits more entities to use the completed contract method or cash basis method of reporting income from long-term contracts. Previously, entities with average annual gross receipts (for the prior three years) of under $10 million could use these methods. The limit has been increased to $25 million.
- Repeals corporate alternative minimum tax (AMT). Significantly, the repeal will now eliminate the AMT adjustment for taxpayers using completed contract or cash basis reporting methods.
- Enhances first-year expensing of fixed asset purchases with 100% bonus depreciation and deductions under section 179.
- Expenses for meals and entertainment are generally no longer deductible.
- Limits deductions of interest expense for large taxpayers.
California is unlikely to conform to the federal changes. As a result, an entity may still be required to use percentage of completion for California tax reporting while being allowed to use the cash method or completed contract method for its federal tax return.
For additional details regarding the changes made by tax reform legislation, see our latest blog post: Tax Reform Has Wide Ranging Impact.