Making Sense of the Construction Tax Landscape
One of the biggest challenges that contractors’ finance and accounting departments face is keeping up with all of the ever-changing tax regulations, incentives and procedures. Staying on top of tax issues is a full-time job, but one that can ensure your company stays compliant with the law, and maximizes benefits and incentives.
That’s why Viewpoint, along with the help of several partner companies and tax experts, brought these discussions to contractors’ backyards with a series of events across the Unites States in February. The complimentary Viewpoint Tax Symposium featured keynote presentations from leading construction tax experts – including Moss Adams, LLP, Marcum LLC and BRAYN Consulting.
A Tax Review
In the kickoff event, held Feb. 5 in San Francisco. Eve Dreyfus, Tax Partner with Moss Adams, presented an in-depth review of 2018-2019 tax measures under the new Tax Cuts & Jobs Act that will impact construction companies.
She discussed the new 21 percent flat tax rate on C-Corps and what that could mean in terms of tax savings for large contractors. She also noted many of the other former tax provisions and incentives that had been removed in favor of a simpler tax structure for corporations. Among them: new pass-through income rules, providing a 20 percent taxable income deduction for owners of certain pass-through entities; modifications to like-kind exchange provisions that limit them only to real property; and limits on losses and limits on fringe/entertainment benefits for business purposes, which used to allow for up to 50 percent deductions. So, now lavish food and beverage or entertainment with clients may not be tax deductible — unless, strangely, it is deemed part of a holiday party.
While the new tax rates ultimately will benefit most contractors, the removal of many key smaller-scale tax benefits could limit contractors options. “Generally, contractors win big and lose big, so when there is a loss, not having some of these tax tools to pull from could make things hard for them,” Dreyfus said.
Dreyfus noted that construction companies should be planning ahead — both in terms of taking advantage of incentives like investing/building in specially designated Qualified Opportunity Zones throughout the country and taking advantage of tax credits like 179D and R&D, and preparing their companies to weather economic downturns. On the latter point, Dreyfus shared some steps contractors can take to remain successful in tough times:
- Properly prepare your company’s infrastructure
- Manage the company’s cash effectively to account for future downturns
- Look at getting modern technology and systems in place to help streamline processes and maximize opportunities
- Carefully look at the company’s capital assets/expenditures and trends; and
- Develop a solid financial strategy and stick to it.
“Now, with these lower tax rates in place and business still solid, it might be one of the best times to consider paying down debts to strategically position your company for future growth and success,” she said.
A Closer Look at Construction Tax Incentives
In the second session, Brady Bryan, CEO and BBA, JD, CQIA of BRAYN Consulting walked attendees through tax incentives like R&D and 179D tax credits that many contractors haven’t traditionally taken advantage of in the past. These benefits, Bryan said, can save contractors tens to hundreds of thousands of dollars each year.
Though Bryan touched on 179D, most of his presentation revolved around understanding the federal and state R&D tax incentives. With the new tax rates, the R&D credits are as much as five times more powerful than traditional deductions for C-Corps, thanks to the 21 percent tax rate. Meanwhile S-Corps and partnerships also see a boost with a net credit increase of up to 21 percent.
So what qualifies as falling under the R&D tax credit umbrella? That’s where some contractors can get tripped up, Bryan said. He explained it as a four-part test to qualify:
- Something needs to be significantly new or improved;
- It has to be technical in nature;
- But it has to be technologically uncertain in its capacity or methodology (not a process, design or tool that has been proven as tried and true); and
- There has to be some process of experimentation (trial and error)
Some examples of qualified activities that have earned R&D tax credits for contractors include new forms of preconstruction planning, new means and methods of development, value engineering, BIM, innovative crane plans, new job specific equipment, sub-system coordination and certain forms of electrical detailing.
Check out this video for more on how to qualify.
“The key is documentation,” Bryan said. “There has to be good project or procedural documentation to support the innovation, showing the efforts to new research and design initiatives.”
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