Tax law is always changing. As a contractor or home builder, make sure you keep up with and take advantage of, tax credits that may be available to you.
Tax time is getting closer, and while everyone has been adapting to the most recent tax law changes, after the Tax Cuts and Jobs Act that was signed in late 2017, those in the construction realm have seen some big impacts. Failing to understand each and every tax credit that construction companies and contractors can take advantage of could be leaving money on the table.
Here’s a look at some of the changes that could affect builders and contractors, as well as tax credits these business owners can take advantage of.
Tax rate changes
The new tax law that came into effect in 2018 decreased the tax rate for home builders, construction contracting companies, or developers that are C corporations from 35% to 21%. Pass-through entities saw a decrease in the tax rate from 39.6% to 37%.
Other items that home builders should know, according to the National Association of Home Builders include:
The mortgage interest deduction now has a cap of $750,000, down from $1 million.
Taxpayers can deduct up to $10,000 of taxes, both state and local, which can include property tax and income or sales tax.
Homeowners can exclude up to $250,000 if single and $500,000 if married in capital gains on the profit they receive from selling a home. They just have to have lived there for the last five years.
The seven tax brackets range from 10% to 37%, which could help small businesses.
Alternative energy equipment installation
A 30% tax credit may be applicable if a property has certain qualifying alternative energy equipment installed. This includes the installation of solar energy systems, geothermal heat pumps, wind turbines, and fuel cells. This credit opportunity is still in effect, but it’s set to expire in 2022, and the rate will decrease from 30% to eventually reach 22% before January 1, 2022.
A full searchable list of current tax credits and rebates related to energy and efficiency updates for each state can be found at Energy.gov.
Between 2018 and 2026, non-corporate taxpayers can report a new deduction on business income: 20% of qualified income from one of the following:
- S corporation
- Sole proprietorship
Income that would qualify here would be from construction, architectural, or engineering activities or services. There is a limit, however: 50% of W-2 wages or 25% of W-2 wages added to 2.5% of qualified property, whichever is greater.
The overall limit is 20% of taxable income. But, if taxable income is less than $157,000 for singles and $315,000 for a married couple, the above wage limitation doesn’t apply.
A big benefit to construction industry workers is that the maximum rate on qualified business income for those pass-through owners who are in the maximum tax bracket at 37%, and who are also not under the W-2 wage limitations, is now 29.6%, down from 39.6%: about a 25% decrease.
Gross receipts threshold for postponing tax
The new tax law increased the gross receipts threshold up to $25 million from $10 million, for contractors to hold off paying taxes on income if the contract isn’t completed in that tax year. Previously, this threshold applied only to small contractors, whose gross receipts were $10 million or less, or $5 million or less if a C corporation.
Disallowance for business interest
Another change that went into effect in 2018 was that businesses are now subject to a disallowance of a deduction for interest expense over 30% of adjusted taxable income. This income number is calculated without regard to interest, depreciation, amortization, depletion, or net operating loss deductions.
If a business has $25 million or less in annual gross receipts on average for the prior three years, they’re exempt from this limitation.
Note on the domestic production activities deduction
The tax deduction for contractors’ domestic production activities was repealed under the new tax law, which had been 9% of construction net income for activities in the United States.
Because tax laws are always complex and may change from year to year, it’s important to pay close attention to changing regulations or loosening restrictions. It’s always a good idea to talk to a professional about which tax credits you may be eligible for.
Our team at No Boundaries Advisors is here to help. From advisory and accounting services to tax planning and financial reviews, our goal is to help builders and developers create a personalized business plan that will help move them forward. Contact us today to speak with one of our experienced professionals.