2A — January 31 - February 13, 2020 — M id A tlantic Real Estate Journal
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M id A tlantic R eal E state J ournal Publisher, Conference Producer . .............Linda Christman AVP, Conference Producer ...........................Lea Christman Publisher ........................................................Joe Christman Section Publisher ............................................. Steve Kelley Section Publisher ............................................... Kim Brunet Editor/Graphic Artist..... .................................Karen Vachon Office Manager ...............................................Kerrin Devine Contributing Columnists .............................. Gina Perrone, CPA, MST and Adam Nelson, CPA, MST, Sax, LLP; Ashley Kettler, CPA, Withum; Michael Mullin, IBS; Lee E Wasser- man, LEW Corporation; Noel K. Walsh, E.B. Cohen Mid Atlantic R eal E state J ournal ~ Published Semi-Monthly Periodicals postage paid at Hingham, Massachusetts and additional mailing offices Postmaster send address change to: Mid Atlantic Real Estate Journal 350 Lincoln St, Suite 1105, Hingham, MA 02043 USPS #22-358 | Vol. 32, Issue 2 Subscription rates: 1 year $99.00, 2 years $148.50, 3 years $247.50 & $4.00 single issue - plus postage REPORT AN ERROR IMMEDIATELY MARE Journal will not be responsible for more than one incorrect insertion Phone: 781-740-2900 | Fax: 781-740-2929 www.marej.com
M id A tlantic Real Estate Journal
Adam Nelson, CPA, MST Gina Perrone, CPA, MST
Construction Industry Tax Update T here are many changes, rising challenges, and emerging trends facing the construction industry as it continues to evolve. As we kick off the new year and decade, consider the following tax up- date relating to the construc- tion industry when planning for success. Topics include tax accounting-method opportuni- ties, the Qualified Business In- come Deduction for contractors, the business interest expense limitation, and notable IRS compliance campaigns affect- ing businesses with over $10M of assets. Tax Accounting-Method Opportunities For tax-year 2019, contrac- tors with average gross receipts under $26M for the prior 3 years may use the cash method of accounting. Such contractors are also exempt from the per- centage-of-completion method of accounting for long-term con- tracts expected to be completed within 2 years. New Jersey does not pro- hibit “pay-if-paid” clauses in contracts. On a contract-by- contract basis, taxable income may be adjusted when the sub-contractor has not yet been paid. If sub-contracts contain the appropriate “pay-if-paid” provision, advance consent from the IRS is needed by fil- ing Form 3115 “Application for Change in AccountingMethod.” However, if sub-contracts don’t include this provision, and their wording is changed, this con- stitutes a change in facts — no Form 3115 is needed, and there is no $10,800 user fee. Note that the change should not impact normal business practices. The Qualified Business Income Deduction for Con- tractors This provision, created in December 2017, allows a 20% deduction of Qualified Business Income (QBI). Under current law, this provision will sunset in 2026. QBI is qualified in- come, gain, deduction, and loss from a partnership, S-Corp, or sole proprietorship. QBI does not include reasonable com- pensation paid to a partner or shareholder. Income from“specified service trades or businesses” (SSTB’s) is excluded. SSTB’s are law,
health, consulting, financial services, or any trade/business where the principal asset is the reputation/skill of one or more of the owners/employees. Engi- neers and architects are specifi- cally excluded from SSTB’s. If your 2019 married-filing-jointly income is under $321,400, your 2019 married-filing-separately income is under $160,725, or your single/head-of-household income is under $160,700, you can still benefit from the QBI deduction even if you work in an SSTB. The benefit phases out to $0 once income reaches $100,000 more than the stated thresholds. The AICPA reports that most contractors took advantage of the full QBI deduction for tax- year 2018. Profits were healthy and the W-2 limit had little or no impact. There are planning issues related to owners’ rea- sonable compensation. Aggre- gation with real estate entities is available for self-rentals and for businesses under common control. The Business Interest Expense Limitation for Contractors This provision, known as Section 163(j), also created in December 2017, limits the business interest expense de- duction to 30% of adjusted taxable income (ATI). ATI is calculated as taxable income without regard to non-business income/expense, business inter- est income/expense, the net- operating-loss deduction, the QBI deduction, and for years before 2022, deductions for depreciation, amortization, and depletion. Any limited interest expense deduction is carried forward and used in a subsequent year when the business generates enough ATI to take the deduc- tion. Businesses with average gross receipts under $26M for the prior 3 years are exempt. Real-property trades or busi-
nesses may elect out of Section 163(j) but must then use the slower Alternative Deprecia- tion System (ADS). Note that construction activities qualify as real-property trades or busi- nesses. Active IRS Large- Business Audit Campaigns The IRS continues to pursue audit campaigns to improve return selection, identify po- tential non-compliance issues, and make the best use of lim- ited resources. Here are the top 8 active audit campaigns impacting the construction industry: 1. S-Corp distributions 2. S-Corp losses claimed in excess of basis 3. S-Corp Built-in Gains tax, as it applies to assets sold by the S-Corp within 5 years of converting from a C-Corp. 4. Sale of partnership interests 5. Related-party transac- tions 6. Interest capitalization of self-constructed assets 7. Offshore private banking 8. Virtual Currency Reach out to Sax’s Construc- tion Practice to discuss plan- ning opportunities related to the topics above. We can help you evaluate the short- and long-term effects of account- ing-method changes, QBI, and Section 163(j), and many other important items to consider. Gina Perrone, CPA, MST is a senior tax manager at Sax LLP, and a mem- ber of Sax’s Construction Practice. She specializes in high-quality tax services and planning opportunities to meet clients’ ultimate goals and objectives. Adam Nelson, CPA, MST is a senior tax associate at Sax LLP, and a mem- ber of Sax’s Construction Practice. He specializes in addressing the compliance challenges of multi-state businesses.
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