There have been numerous legislative updates this year that could impact the tax situation of construction companies, including the Tax Cuts and Jobs Act (TCJA), the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the Inflation Reduction Act. That’s why intentional tax planning with your advisor is critical to maximizing tax opportunities for the 2022 tax year and beyond. Our whitepaper provides in-depth summary and considerations for tax planning for small and large contractors.
Key Highlights
Highlights from the article include the following:
- The TCJA, and later revenue procedures from the Internal Revenue Service (IRS) that gave us Accounting Standard Codification (ASC) 606 – Revenue Recognition, provided changes in the tax accounting methods available to contractors. Additionally, whether you are considered a small or large contractor can impact which method is available to you. Accounting methods are considered revenue neutral, but their timing changes could result in a deferral of tax liabilities.
- Section 199A provides a 20 percent deduction from Qualified Business Income (QBI) from a domestic business that operates as a partnership, S-Corporation, sole proprietorship, estate or trust. Any income earned by a C-Corporation or by providing services as an employee is ineligible for the deduction. Specified Service Trade or Businesses (SSTBs) can reduce or eliminate the amount of deduction received – generally construction activities do not fall under the IRS’s definition of an SSTB; therefore, they should qualify for the Section 199A deduction. However, construction companies should still evaluate their wages and qualified property limitations, as well as the de minimus rule.
- Per the TCJA, the deduction for research and experimentation costs as defined in Section 174 would be eliminated beginning in 2022. While the Build Back Better Act (BBBA) contained a provision to defer the effective date until after 2025, the legislation is currently stalled in Congress. While many are hopeful the TCJA rule will be appealed, contractors must continue to do business in the reality that it is current law. Therefore, careful planning must be taken for 2022 tax purposes to evaluate the impact to taxable income, cash flow, financials and estimated tax payments.
- The maximum deduction allowed per Section 179 for both new and used property increased for 2022. This means the maximum deduction increased to $1.08 million, begins to phase out at $2.7 million and is fully phased out at $3.78 million for 2022.
- Contractors should continue to monitor and evaluate opportunities tied to clean energy, climate change and related tax credits, particularly the Section 179D Energy-Efficient Commercial Building Deduction and the Section 45L Energy-Efficient Home and Multifamily Tax Credit, with expanding credits beginning in 2023.
To learn more, download the article or reach out to Mary Beth Saylor.
