How The New Tax Bill Will Effect Construction Employers
It has been more than 30 years since the United States has seen a tax overhaul, and the latest changes are going to have a significant impact on the construction industry and sectors that impact the construction industry directly. First and foremost, this plan cut the corporate tax rate from 35% down to 21%, good news for companies across the country. However, there have also been substantial changes to how money that is earned or stored offshore will be treated going forward. Here are the highlights:
Contractors who are currently structured as C Corporations or pass-through entities will benefit from significant tax relief while the public construction sector will benefit from uninterrupted flow of financing for private-activity bonds. PABs will retain their tax-free status and energy-related exploration will see favorable treatment. Tax credits will give these and some other areas a big sigh of relief going forward, however, there are PAB use limits that may become applicable and design professionals may not be able to take advantage of new, lower pass-through tax rates.
If you are not familiar with PABs, they are a finance scheme that allow private entities who are working on public projects to borrow money at the tax-free rate government agencies are given. While the original tax bill proposed by the GOP eliminated PABs entirely, the Senate restored them, but both chambers are against tax-exempt stadium bonds (a vehicle which many states rely on for constructing new sports venues).
Low-earners who currently have a 15% tax rate will see a raise in their tax bill at the new 21% rate, but others will see a substantial decrease. However, because many construction companies are formed as pass-through entities, allowing the company owners to include their business profits on personal tax returns, the new tax reform will allow individuals to get a 20% break on this income. However, one provision will prevent some consulting firms and professional service providers (such as engineers and architects) from taking that deduction.
The energy sector, on the other hand, received particularly good news because the wind sector’s production tax credit has been re-instated. This credit along with a credit for the purchase of electric vehicles will green light the exploration of Alaska’s Arctic National Wildlife Refuge and offer other benefits to those working this sector.
Now, in addition to the new tax bill’s direct impact on the construction sector, there is also some indirect impact resulting from its effect on related industries. First and foremost, because the new tax bill impacts several areas of Human Resources, such as offshoring, automation, paid leave, and fringe benefits, construction will see some drawbacks through these changes. The impact on HR offers both some benefits to employees, along with some leeway for businesses looking to automate or outsource work.
The technology sector will also be impacted. Since many large tech companies hold large sums of money oversees, they should benefit from the corporate tax cuts. However, SMBs and companies with particularly large domestic holdings are unlikely to see the same positive effect. Because of the losses of new income tax applications for grad students and research and development tax breaks, big tech companies are unlikely to see the positive outcome they expected when they lobbied for corporate tax cuts.
While the corporate tax rate previously sat at 35%, very few tech companies paid that on average. Computer service companies paid around 16% on average and internet software companies paid around 25% on average. The overall rate being decreased to 21% may not help them as much as they once thought. However, the lower, one-time repatriation tax is expected to have a great effect on these companies. When it comes to United States companies with the largest overseas holdings, tech companies are at the top of the list.
In fact, between Apple, Microsoft, Cisco, and two other large companies, around $564 billion is held abroad. Apple holds $246 billion alone. Because the tax levy on this offshore cash will be dropping from 35% to 15.5%, these companies will see substantial effects. Less liquid assets from now on will also be taxed at just 8%.
The new tax bill also causes some issues and raises hurdles when it comes to city governments and their infrastructure. The new plan is expected to make it more difficult for city governments to afford changes that can lead to the development of more economically sustainable communities. By eliminating some key resources for cities, they may fall short of some development goals. This can work to slow down the growth of the local economy, and it can also have a more direct impact on the public projects construction companies are able to work on.
All of these industries relate to the construction sector in one way or another, so the construction industry in particular is expected to see both direct and indirect impact from the latest tax reform in the months going forward. If you haven’t already, getting in touch with a tax professional about these changes can help you substantially by preparing you for these changes and helping you understand what exactly they mean for your company. It may also be a wise time to re-think your business structure for additional tax benefits under this new plan.