Tax reform took firm hold this year, affecting both individuals and businesses, including major changes for some in the construction industry as Congress passed and President Trump signed H.R. 1, The Tax Cut and Jobs Act, last December. This legislation, in most cases, increased take-home pay, lowered corporate tax rates and included provisions designed to increase expensing limits.
The signature piece of the legislation may be a reduced corporate tax rate, which was slashed from 35 to 21 percent and was made permanent. Personal-services corporations are also now taxed at 21 percent.
Pass-through businesses – those that are structured to allow owners to include profits on their personal tax returns such as partnerships, S Corporations or sole proprietorships and are taxed at the individual’s marginal income tax rate – received significant savings, too. A section was added to the tax code (199A) that provides a 20-percent deduction on such income through 2025. Limitations do apply, such as phase-outs at certain income levels.
“Lowering the tax rate provides substantial savings that allow us to keep more capital to invest in new equipment and pay off financed machinery sooner,” said Don Satoski, President/Co-owner of Landmark Materials, LLC, of Union Mills, Ind. “Those are excellent benefits for us.”
Service businesses, including architecture and engineering firms, are eligible for a deduction, but are excluded from receiving the 20-percent deduction above $157,000 for individuals and $315,000 for married filing jointly. Phase-outs apply as does the expiration after 2025.
Section 179 doubled, made permanent
The Tax Cut and Jobs Act affects business expensing in a variety of ways, such as temporary full expensing for property currently eligible for bonus depreciation for five years. That applies to property placed in service after September 27, 2017, including new and used equipment.
“The tax plan is great for us, especially on equipment purchases,” shared David Bussman, Vice President of MGL, Inc., a utility contractor based in Cullman, Ala. “Combine that with the zero-percent financing on the machines we bought last fall, and the savings are significant.”
Section 179 Expensing, which allows taxpayers to deduct the cost of certain property types as an expense rather than being capitalized and depreciated, was permanently increased from $500,000 to $1 million with a $2.5 million phase-out and is indexed to inflation. The definition of property now includes roofs as well as HVAC, fire protection, alarm and security systems added to non-residential buildings already placed in service.
Employee take-home pay rises
A Business Insider analysis showed the average annual pay for construction laborers is $37,890, which made their previous federal tax $3,645. Under the new bill, it estimates a reduction in taxes to $2,916, for a savings of nearly 20 percent.
Along with rate changes, the standard deduction nearly doubled to $12,000 for individuals and $24,000 for those married filing jointly. Previously it was $6,350 and $12,700. The new standard deduction and tax rates are temporary and expire at the end of 2025.
Editor’s Note: This article is based on data from Associated General Contractors of America and is for informational purposes only. It does not reflect all changes under the tax law. You should seek advice from a professional tax adviser on how the legislation affects you and/or your business.