The Tax Cuts and Jobs Act (TCJA) was signed into law in 2017 and generally took effect at the start of 2018. It brought sweeping changes to various aspects of tax law for both individuals and businesses. However, many of its provisions are not permanent. In fact, some of the most important ones are scheduled to expire after 2025. Although the outcome of future elections might affect the fate of many expiring provisions, now is still a good time for construction business owners to read up on the impending tax law changes and plan for their potential impact.
Key Provisions at Risk
If no significant tax legislation is passed by late 2025, many of the law’s provisions will revert to pre-TCJA levels. Key individual provisions scheduled to expire on December 31, 2025, include:
- The top individual income tax rate on ordinary income, which will return to 39.6% (up from 37% currently).
- The standard deductions for individuals, which will return to lower pre-TCJA levels after being roughly doubled under the TCJA.
- The gift and estate tax exemptions, which will drop to $5 million (though indexed for inflation) from the current $13.61 million.
Other provisions that may significantly impact your construction business include:
- The Section 199A deduction for many “pass-through” entities. Under this provision, owners of sole proprietorships and eligible pass-through entities (most partnerships and S corporations) may qualify for a deduction of up to 20% of qualified business income (QBI). This substantial tax break is intended to put pass-through entities, including many construction businesses, on more equal footing tax-wise with C corporations eligible for the flat 21% corporate tax rate, which is not scheduled to expire. Business income for pass-through entities is taxed according to ordinary individual income tax rates. Unless Congress acts to extend the QBI deduction, it won’t be available after 2025, potentially substantially increasing tax liability for these entities.
- Employer credit for paid family and medical leave. Under the TCJA, eligible employers that continue to pay wages while employees are on qualified family and medical leave may be able to claim a tax credit calculated as a percentage of wages paid while on leave. This credit won’t be available after 2025 unless Congress acts to extend it.
- Accelerated depreciation. Under bonus depreciation, eligible companies can immediately deduct a certain percentage of the cost of qualifying asset purchases in the year those assets are placed in service. This has been a particularly useful tax break for construction businesses, which must regularly invest in heavy equipment and vehicles. Unfortunately, it is being phased out. The TCJA initially raised bonus depreciation’s deductible percentage to a full 100%. However, it fell to 80% in 2023 and then to 60% this year. It is scheduled to continue decreasing annually to 40% for 2025 and 20% for 2026 before vanishing in 2027. After 2026, absent congressional action, companies will generally have to capitalize the cost of asset purchases and recover those costs much more slowly unless the asset purchases qualify for Sec. 179 expensing.
- The TCJA also increased the Sec. 179 deduction. In 2024, companies may be able to claim first-year-in-service deductions of up to $1.22 million for eligible asset purchases (subject to various limitations). Before the TCJA, Sec. 179 deductions were limited to a mere $500,000. Fortunately, the higher limit isn’t scheduled to expire and will continue to be indexed for inflation annually.
Matters to Consider
Because of the scheduled increase in individual tax rates and lower standard deductions, construction business owners that operate their companies as sole proprietorships, most forms of partnerships, and S corporations, and that do not itemize deductions, may want to consider accelerating income to take advantage of the lower tax rates and higher standard deductions through 2025.
Beyond that, evaluating the tax accounting methods your construction business uses on a contract-by-contract basis is crucial. Several options are available to align tax payments with contract revenue, including the accrual method, which allows eligible contractors to recognize revenue as soon as they bill for work, regardless of payment status.
Additionally, work with your leadership team to forecast whether you will need to make any big-ticket asset purchases in the upcoming years—and, if so, which ones. You may want to buy equipment, vehicles, and other qualifying items while bonus depreciation is still available and before it decreases any further.
Bear in mind that your construction company may be able to combine bonus depreciation with the Sec. 179 deduction in the same tax year. If bonus depreciation continues to be phased out as scheduled, some contractors may still be able to claim Sec. 179 deductions.
Moves to Make
The sunsetting of many of the TCJA’s key provisions has been on the horizon for a while now, but it’s starting to get closer. Don’t wait to reconfigure your construction business’s overall tax strategy. Here are some actionable steps:
- Engage a Tax Consultant: Partnering with a tax consultant can provide tailored advice and strategies specific to your construction business. They can help you navigate the complex tax landscape and ensure you’re making informed decisions.
- Accelerate Income: Consider strategies to accelerate income into the current tax years to take advantage of the lower tax rates and higher standard deductions available through 2025. This might include timing invoicing and revenue recognition to optimize tax outcomes.
- Review Depreciation Strategies: Take full advantage of the current bonus depreciation rules and Sec. 179 expensing. Plan significant asset purchases sooner rather than later to maximize your tax benefits.
- Evaluate Business Structure: With potential changes to the Section 199A deduction for pass-through entities, it might be time to reassess whether your current business structure is the most tax-efficient.
- Plan for Future Expenditures: Identify and plan for future big-ticket purchases and investments in equipment. If possible, expedite these purchases to benefit from current depreciation rules.
- Consider Family and Medical Leave Credits: If you offer paid family and medical leave, make sure you’re taking full advantage of the available tax credits. This could be an area for potential savings that should not be overlooked.
- Monitor Legislative Developments: Stay informed about potential tax legislation changes. A proactive approach will allow you to quickly adapt your tax strategy in response to new laws.
The expiration of several key provisions of the TCJA by 2025 presents both challenges and opportunities for construction business owners. By taking a proactive approach and working with a knowledgeable tax consultant, you can navigate these changes effectively and position your business for continued success.
For comprehensive tax planning and consulting services tailored to your construction business, contact Burton McCumber & Longoria. Our experienced tax consultants are ready to assist you in optimizing your tax strategy and ensuring compliance with all relevant tax laws. Contact us today to schedule a consultation.
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