5. State and local
tax deduction
6. Depreciation changes
A very impactful change included
in the final bill is the limiting of the
deduction available to individuals for
sales, income, or property taxes
paid to state or local tax authority to
$10,000 ($5,000 for a married tax-
payer filing a separate return) for tax
years beginning after Dec. 31, 2017
and beginning before Jan. 1, 2026.
This limitation does not apply to
property taxes paid or accrued in
connection with carrying on a trade
or business.
The limitation does not apply to
state and local taxes of businesses
taxed as a ‘C’ corporation.
The bill specifically includes a
provision that disallows a 2017 de-
duction for prepaying state or local
income tax for a taxable year begin-
ning after Dec. 31, 2017. Any
amount paid in a taxable year begin-
ning before Jan. 1, 2018 shall be
treated as being paid on the last day
of the tax year for which the tax ap-
plies. The bill includes a provision that
allows for 100 percent expensing
through bonus depreciation of cer-
tain business assets placed in serv-
ice after Sept. 27, 2017 through
Dec. 31, 2022. The amount of
bonus depreciation allowed is then
phased-down over four years as fol-
lows starting: 80 percent in 2023,
60 percent in 2024, 40 percent in
2025, and 20 percent in 2026. The
requirement that the property be
new was also removed and re-
placed with a requirement that the
property simply be new to the tax-
payer – an impactful distinction.
The bill includes some additional
changes that have the potential to
benefit many contractors. For exam-
ple, Section 179 expensing limits
will be increased to $1 million with
the phase-out threshold being in-
creased to $2.5 million with both
thresholds subject to inflation in-
creases for tax years beginning
after Dec. 31, 2017. Furthermore,
the definition of qualified property is
expanded to include improvements
to non-residential real property in-
cluding roofs, heating, ventilation,
and air-conditioning property, fire
protection and alarm systems, and
security systems if placed in service
after the date such real property
was first placed in service.
7. Interest expense deduction
limitation The bill also includes a provision
that limits the deduction for interest
expense incurred by a trade or busi-
ness to the sum of business inter-
est income, floor plan financing
interest and 30 percent of the ad-
justed taxable income of a taxpayer
for the year. For tax years beginning
before Jan. 1, 2022, adjusted tax-
able income will be computed with-
out regard to depreciation,
amortization, or depletion expense.
Adjusted taxable income is other-
wise generally defined as a tax-
payer’s taxable income without
regard to any income, gain, deduc-
tion or loss not properly allocable to
the trade or business, any business
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10 — Winter 2018 — The North Carolina Construction News
interest expense or business interest income and any net
operating loss.
Real property trades or businesses, including rental
property activities that qualify as a trade or business,
may elect out of the interest deduction limitation if that
trade or business uses the alternative depreciation sys-
tem, which generally results in longer, slower deprecia-
tion deductions. Any interest not deductible for any tax
year shall be carried forward indefinitely and treated as
business interest paid or accrued in the succeeding tax
year. An exemption to these rules applies to taxpayers with
average annual gross receipts for the prior three tax
years of less than $25 million.
8. Domestic Production Activities Deduction
(DPAD) repealed
For tax years beginning after Dec. 31, 2017, DPAD
(also known as Section 199) is repealed. DPAD was a de-
duction allowed under pre-act rules that allowed contrac-
tors performing new construction or substantial
renovation in the U.S. to claim a deduction of up to nine
percent of taxable income (with certain limitations).
9. Like-kind exchanges
Under the new law, like-kind exchanges are limited to
only exchanges involving real property that is not prima-
rily held for sale. This new limitation applies to ex-
changes completed after Dec. 31, 2017; however, a
transition rule allows like-kind exchange treatment for
any property disposed of in an exchange on or before
Dec. 31, 2017, or for any property received by a taxpayer
in an exchange on or before the same date. This excep-
tion generally allows for like-kind exchanges already in
process to still take advantage of the current like-kind ex-
change rules. This may have an impact to contractors
who have typically exchanged equipment and machinery
in the past.
10. Estate and gift taxes and
generation-skipping transfer tax
The law doubles the base estate and gift tax unified
credit exclusion to $10 million, effective for decedents
dying and gifts made after 2017 and before 2026. The bill
also increases the GST exemption to $10 million. This ef-
fectively increases the inflation-adjusted exclusion and
exemption amounts to $11.2 million ($22.4 million for a
married couple) for 2018.
These increased exclusion and exemption amounts
will provide planning opportunities for contractors look-
ing to transition their estate in the coming years.
In conclusion . . .
As there are far more elements to the tax reform than
covered here, contractors may consider familiarizing
themselves with the finer details of the changes. Loop-
ing in your trusted advisor and CPA is strongly recom-
mended to ensure you are prepared for the oncoming
effects – both favorable and complex – to your financial
posture. Sarah Windham is a partner
at the Dixon Hughes Goodman
LLP (DHG) office in Charleston,
SC. She can be reached at
(843) 727-3708 or by email at
sarah.windham@dhgllp.com. Al Windle • 704.945.2176 • awindle@slk-law.com
The North Carolina Construction News — Winter 2018 — 11