Building a Strong Foundation on Tax Reform – Impact on the

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Building a Strong Foundation on Tax Reform – Impact on the Construction Industry

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TO RECEIVE CPE CREDIT• Individuals

Participate in entire webinar

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INTRODUCTIONSTravis TruesdellDirector Kansas City, MO

Jason GroshSenior ManagerMadison, WI

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WHAT WE’LL COVER TODAY

Quick overview of TCJA• Type of entity?

What does this mean for construction companies?• Accounting methods

• Additional deductions

What does this mean for A&E firms?• The Good – Tax credits

• The Bad – Lost tax deductions

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TAX RATESCorporate

Corporate Tax RateFlat rate of 21 percent effective January 1, 2018(Previously top rate of 35 percent)

Alternative Minimum TaxRepealed(Previously 20 percent)

Personal Service CorporationsFlat rate of 21 percent effective January 1, 2018(Previously flat rate of 35 percent)

TAX RATESTax brackets: single

2018 Ordinary Rates 2018 Capital Gains RatesBracket Previous

Tax Law*New Tax

Law*^Previous Tax Law*

New Tax Law*^

$0–$9,525 10% 10% 0% 0%

9,526–38,600 15% 12% 0% 0%

38,601–38,700 15% 12% 0% 15%

38,701–82,500 25% 22% 15% 15%

82,501–93,700 25% 24% 15% 15%

93,701–157,500 28% 24% 15% 15%157,501–195,450 28% 32% 15% 15%195,451–200,000 33% 32% 15% 15%200,001–424,950 33% 35% 15% 15%424,951–425,800 35% 35% 15% 15%

425,801–426,700 35% 35% 15% 20%

426,701–500,000 39.6% 35% 20% 20%More than 500,000 39.6% 37% 20% 20%

*Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000)

^Expires after December 31, 2025

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TAX RATESTax brackets: married filing jointly

2018 Ordinary Rates 2018 Capital Gains RatesBracket Previous

Tax Law*New Tax

Law*^Previous Tax Law*

New Tax Law*^

$0–$19,050 10% 10% 0% 0%

19,051–77,200 15% 12% 0% 0%

77,201–77,400 15% 12% 0% 15%

77,401–156,150 25% 22% 15% 15%

156,151–165,000 28% 22% 15% 15%

165,001–237,950 28% 24% 15% 15%237,951–315,000 33% 24% 15% 15%315,001–400,000 33% 32% 15% 15%400,001–424,950 33% 35% 15% 15%424,951–479,000 35% 35% 15% 15%

479,001–480,050 35% 35% 15% 20%

480,051–600,000 39.6% 35% 20% 20%More than 600,000 39.6% 37% 20% 20%

*Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000)

^Expires after December 31, 2025

LIMITATIONS ON LOSSES

Net Operating Loss (NOL)

• Deduction limited to 80 percent of taxable income(1)

• No carryback (except property/casualty insurance companies & certain farm losses)(2)

• Carried forward indefinitely(2)

Excess Business Loss Limitation

• Aggregate deductions attributable to trades or businesses over aggregate gross income & gain limited to $250,000 single/$500,000 married filing jointly (MFJ)

• Excess loss treated as NOL

• Sunsets December 31, 2025

(1) Applies to losses arising in tax years beginning after December 31, 2017(2) Applies to losses arising in tax years ending after December 31, 2017

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Bonus Depreciation

• 100 percent through 2022 for qualified property placed in service after September 27, 2017

• 80, 60, 40 & 20 percent for property placed in service in 2023–2026, respectively

• Definition of qualified property expanded by removing requirement that original use begin with taxpayer

• Specified property included & excluded

(Previously 40, 30 & 20 percent bonus depreciation for qualified property in 2018–2020, respectively; property must be new to qualify)

DEPRECIATIONPROVISIONSCost recovery

Qualified Improvement Property

• Effective January 1, 2018

• Removed qualified leasehold, restaurant & retail

• Any improvement to an interior portion of a building that is nonresidential real property

• 15-year straight-line depreciation (40-year ADS)

• Drafting error


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Section 179 Expensing

• Up to $1 million

• Phaseout beginning at $2.5 million of assets placed in service

• Definition of qualified property expanded to include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security systems

(Previously up to $520,000; phaseout beginning at $2,070,000 of assets placed in service)


• Deduction generally limited to sum of Business interest income

Floor plan financing interest

30 percent of “adjusted taxable income” BUSINESS INTEREST EXPENSE DEDUCTION

Taxable income

+/- Items of income, gain, deduction or loss not properly allocable to trade/business

+ Business interest expense

- Business interest income

+ Net operating loss

+ Pass-through business deduction

+ Depletion, depreciation & amortization (taxable years beginning before January 1, 2022, only)

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BUSINESS INTEREST EXPENSE DEDUCTION

• Excess carried forward indefinitely

• Limit does not apply to

Businesses with average annual gross receipts ≤ $25 million (affiliated group basis)

Regulated public utility business (including electric cooperatives)

Following businesses may elect not to be subject to limitation provided they use ADS method for depreciation

o Real property businesses

o Farming businesses (including agricultural & horticultural cooperatives)

www.bkd.com/docs/pdf/Pass-Through-Business-Deduction.pdf

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www.bkd.com/docs/pdf/Pass-Through-Business-Deduction.pdf

QUALIFIED BUSINESS INCOME DEDUCTIONSunsets 12/31/2025

• Domestic: effectively connected with conduct of trade/business within U.S. & Puerto Rico

• Qualified business income: net amount of items of income, gain, deduction & loss with respect to any qualified trade or business, except

Reasonable compensation

Guaranteed payments

Investment income

o Short-term & long-term capital gain/loss

o Dividend income

o Interest income

(Note overall loss treated as loss for purposes of calculation in subsequent year)

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• Need further guidance in several areas

Definition qualified trade or business

Application of grouping elections

Clarification on how definition of specified service trade or business applies

Whether wages paid by an affiliated management company count for purposes of wage limitation


• Limitations: Apply when taxable income exceeds $157,500 single ($315,000 MFJ) & phase out over next $50,000 ($100,000) of taxable income

1. Wage limitation: Greater of

o 50 percent of W-2 wages paid with respect to business OR

o 25 percent of W-2 wages paid plus 2.5 percent of unadjusted basis (immediately after acquisition) of all qualified property

2. Not allowed for “specified service trade or businesses” once income exceeds threshold amounts

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Health

Law

Accounting

Actuarial science

Performance arts

Investing & investmentmanagement, trading or dealing in securities, partnership interests or commodities

Consulting

Athletics

Financial services

Brokerage service

Principal asset is reputation or skill of one or more of its employees or owners

• Specified service business: Any trade or business involving performance of services in fields of

Facts• S corporation contractor

• 2 shareholders 50/50

• 25 employees – total payroll of $800,000

• No QBI loss carryover

• For tax year ending December 31, 2018 Taxable income of $1,000,000

Compensation to owners: $300,000

Qualified business income of $1,000,000

Depreciable cost of equipment, etc., $10,000,000

Allocable qualified business income deduction = $100,000 (for each shareholder)• 20 percent of QBI

• 50 percent of W-2 wages

• 25 percent of W-2 wages + 2.5 percent of unadjusted basis of qualified property

$100,000

$275,000 ($550,000 x .50 = $275,000)

$262,500 ($137,500 + ($5,000,000 x .025 = $125,000))

QUALIFIED BUSINESS INCOME DEDUCTIONExample 1

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CONTRACTOR ACCOUNTING METHODS POST-TCJA

• Cash basis

• Accrual basis

• Accrual excluding retainage

• Completed contract

• Percentage completion options 10 percent method

Percentage completion excluding retainage payables

Percentage completion excluding subcontractor payables in pay if paid states

Percentage completion capitalized cost method (70/30)

• Impact on look-back

TCJA IMPACT ON CONTRACTOR DEDUCTIONS

• Domestic Production Activities Deduction vs. Pass-Through Business Deduction

• Depreciation

• Business Interest

• Net Operating Loss

• Meals & Entertainment

• R&D Credit & Expenses

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www.bkd.com/docs/pdf/Meals-Entertainment-chart.pdf

www.bkd.com/docs/pdf/Meals-Entertainment-chart.pdf

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TCJA TAX RATE CONSIDERATIONS FOR FISCAL YEAR CONTRACTORS

• C Corporations

Flat rate

Blended rate – see next slide

Revisit deferral strategies

• S Corporations & Partnerships

Section 7519 deposit – still required

Adjusted highest IRC Sec 1 individual tax rate change from 40.6 to 38 percent

• Blended rate for fiscal filers

• Special rules apply when law changes are effective as of beginning or end of calendar year

• Example: Taxable income = $1,000,000

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TCJA TAX RATE CONSIDERATIONS FOR ARCHITECTURE & ENGINEERING FIRMS

• C Corporations

Personal service corporations – 14 percent rate reduction

Revisit deferral strategies for 2017 tax returns

• S Corporations & Partnerships

QBI deduction

A&E firms were eliminated from the list of “specified service businesses”

TCJA GOOD NEWS FOR ARCHITECTURE & ENGINEERING FIRMS

• Research & Development (R&D) Credit

Permanently extended by TCJA

• Historic (Rehabilitation) Tax Credit

Keeps credit intact

Benefits are spread over five-year period as opposed to all in year one

• Accelerated Depreciation Provisions

100 percent bonus depreciation

Expanded §179 deductions

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TCJA BAD NEWS FOR ARCHITECTURE & ENGINEERING FIRMS

• Meals & Entertainment Expense Disallowance

Entertainment, amusement or recreation expenses are no longer deductible (previously 50 percent deductible)

Meals for employees either on business premises or incurred during business travel 50 percent deductible

o Certain exceptions to this rule previously allowed for some meals to be 100 percent deductible

• Entities with International Operations

Deemed repatriation calculations

APPROACH TO PLANNING AFTER TCJA

Step 1 Step 2 Step 3

Review your current income tax situation

Understand how tax changes affect you & your business in 2017 & beyond

Evaluate accounting methods & possibility of future guidance before filing 2017 tax returns

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APPROACH TO PLANNING AFTER TCJA

Step 4 Step 5 Step 6

Consider how tax law changes affect 2018 estimated tax payments

Review choice of entity considerations under new tax law

Evaluate other strategies to plan for new tax law

More Clarity Ahead

1. Resource Center• bkd.com/taxreform

2. Simply Tax Podcast• bkd.com/simplytax

3. BKD Thoughtware®

• bkd.com

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Questions?

CONTINUING PROFESSIONAL EDUCATION (CPE) CREDIT

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

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CPE CREDIT

• CPE credit may be awarded upon verification of participant attendance

• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at [email protected]

Thank You!Travis Truesdell | [email protected]

Jason Grosh | [email protected]

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ABOUT BKD

BKD now has more than 2,600 CPAs, advisors & dedicated staff members working together to serve you. Our expertise goes well beyond the standard accounting services to include risk management, forensic & valuation services, technology & wealth management.

Personalized Service with a Global ReachOur trusted advisors offer solutions for clients in all 50 states & internationally. With 36 offices in 16 states, BKD & its subsidiaries combine the insight & ideas of multiple disciplines to provide solutions in a wide range of industries.

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Documents

Building a Strong Foundation on Tax Reform – Impact on the