CONSTRUCTION
TOP 10
LIST of Provisions Included
in 2017 Tax Reform
By Sarah Windham
Special to North Carolina Construction News
The last major tax reform legisla-
tion was passed in 1986. Since
then, the tax rules – Internal Rev-
enue Code amendments, regula-
tions, procedural guidance and
court case law – have morphed into
a complex system for tax paying
contractors. The recently signed bill
is a significant modification to the
existing system and the consensus
is clear. Most businesses expect
their income tax expense to de-
crease, including contractors.
Though there are many moving
8 — Winter 2018 — The North Carolina Construction News
parts in the new tax law with the
potential to affect businesses and
individuals to varying degrees, this
article highlights what we consider
10 of the most significant changes
for construction companies.
1. Individual tax rates and
corporate tax rates
The final bill settled on keeping
the same number of individual tax
brackets as in current existence:
seven. However, the new tax law re-
duces individual income tax rates to
10, 12, 22, 24, 32, 35 and 37 per-
cent, and raises the income levels
subject to each tax rate. These rates
apply to tax years beginning after
Dec. 31, 2017 and beginning before
Jan. 1, 2026, unless subsequently
extended by future legislation. On
the corporate side, the current grad-
uated tax rate was removed in favor
of a flat 21 percent rate for tax years
beginning after Dec. 31, 2017.
2. Increase in Small
Contractor Exemption
Amount Under prior tax law, contractors
whose average annual gross re-
ceipts were less than $10 million
were exempt from using the per-
centage of completion (PCM)
method of accounting for income
tax purposes. Under the new bill,
the average annual gross receipts
requirement has been increased to
$25 million. This is effective for any
contracts entered into after Dec.
31, 2017. It is important to note that
for commercial contracts, percent-
age of completion is still required to
be used for purposes of the alterna-
tive minimum tax (AMT).
While under the final bill AMT
was repealed for businesses taxed
as a ‘C’ corporation, it was not re-
pealed for individuals. However, it
did provide for increased individual
exemptions. The 2018 exemption
amount was increased from
$86,200 to $109,400 and the phase
out threshold increased from
$164,100 to $1 million for married
filing joint taxpayers. The exemption
amount for single taxpayers in-
creased from $55,400 to $70,300
and the phase out threshold in-
creased from $123,500 to
$500,000. Contractors, other than ‘C’ cor-
porations, considering making the
switch to a method other than PCM
for 2018, will want to consider the
potential for AMT impacts before
making a final decision. If a contrac-
tor switches to a method other than
PCM for 2018, any contracts en-
tered into before Dec. 31, 2017,
would be taxed under the prior
method of accounting even if the
contract continued into 2018.
25 percent of W-2 wages, plus 2.5
percent of the unadjusted basis of
all qualified property. This deduction
applies for tax years beginning after
Dec. 31, 2017 and beginning before
Jan. 1, 2026.
4. Standard deduction,
charitable contributions
and the Pease Limitation
Personal exemptions are re-
moved in the bill in favor of a higher
standard deduction effective for tax
years beginning after Dec. 31, 2017
and beginning before Jan. 1, 2026.
The new standard deduction
amounts will be $24,000 for married
filing joint or surviving spouse,
$18,000 for an unmarried individual
with at least one qualifying child,
and $12,000 for single filers.
Charitable contributions – which,
under old law, were limited to 50
percent of a taxpayer’s AGI – will
now be limited to 60 percent of AGI
effective for tax years beginning
after Dec. 31, 2017 and beginning
before Jan. 1, 2026. The bill will
also repeal the current 80 percent
deduction for certain contributions
to universities made in connection
with athletic seating rights.
The overall limitation on itemized
deductions referred to as the Pease
Limitation will be suspended for tax
years beginning after Dec. 31, 2017
and beginning before Jan. 1, 2026.
This limitation essentially reduced
the value of certain itemized deduc-
tions for high income taxpayers by
three percent for every dollar over
the taxable income limit. The
phaseout was capped at 80 percent
of the total value of itemized deduc-
tions. 2017-2018 edition
3. Pass-through income
deduction Aligning with a reduced corpo-
rate tax rate, Congress provided
pass-through entities with a deduc-
tion for a percentage of their tax-
able income. Starting in 2018, a
deduction will be allowed for tax-
payers who have qualified business
income (QBI) from a partnership, ‘S’
corporation, or sole proprietorship,
subject to limitations. The 20 per-
cent deduction is limited to the
lesser of (1) 20 percent of their
pass-through business income or
(2) the greater of (a) 50 percent of
the W-2 wages paid in the qualified
trade or business, or (b) the sum of
The North Carolina Construction News — Winter 2018 — 9