While tax reform will have a significant impact on all businesses, architecture, engineering and construction (A/E/C) companies in particular are in a unique position to potentially benefit from these changes.
There are tremendous tax planning opportunities and major considerations that will impact how their tax picture unfolds for 2018, according to NYC-based accounting firm Anchin, Block & Anchin LLP.
Final changes to the Tax Cuts and Jobs Act (TCJA) are pending.
“Overall, the new tax law is complex and presents both opportunities and challenges for A/E/C companies,” said Phillip Ross, CPA, CGMA, a partner and leader of Anchin’s A/E/C Industry Groups.
Provisions in the TCJA present A/E/C companies with opportunities to benefit from tax reform, but in order to maximize the potential benefit, lots of planning and strategy is required.
Among the opportunities, Anchin draws attention to the following:
- Under prior law, taxpayers had several requirements and limitations related to the use of the cash method of accounting. Many of these limitations have been loosened or removed under TCJA, resulting in a major potential benefit for many construction companies.
- Beginning in 2018, the average annual gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts will increase from the $10 million to $25 million for contracts entered into beginning in 2018. Businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible method).
A/E/C company owners could be eligible for a new 20 percent deduction based on their qualified business income. Certain items still need to be defined around consulting companies and companies where their principal asset is skill and reputation of its owners.
A/E/C companies who are C-Corps will benefit from the tax rates being lowered to 21 percent and will also benefit from the repeal of the corporate alternative minimum tax.
These changes have many companies considering what business structure would be most beneficial for them. Many factors need to be considered in their overall tax profile.
The research and development tax credit – which is very often underutilized by A/E/C companies – was explicitly preserved in the final TCJA legislation. Many firms would qualify for the benefit and with the changes in the AMT, more firms could be eligible to leverage the credit.
“The most important message we are imparting to our construction, engineering, and architecture clients is that planning, strategy and structuring are key elements to successfully managing and navigating tax reform,” Ross said. “Decisions that they make on their tax returns will have tremendous impact on their firms moving forward.”