President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. This new law is the most significant tax law overhaul in 31 years and it affects corporations, pass-through entities, and individuals. Below is a summary of the substantial changes affecting businesses in real estate and construction. Unless otherwise noted, these changes are effective for tax years beginning after December 31, 2017.
- A new rule limiting like-kind exchanges to real property that is not held primarily for sale.
- The exception for small construction contracts from the requirement to use the percentage of completion method has been expanded to apply to contracts for the construction or improvement of real property if the contract:
- is expected to be completed within two years of the commencement of the contract, and
- is performed by a taxpayer that meets the $25 million gross receipts test.
- The R&D credit has been retained. However, for tax years beginning after December 31, 2021, amounts defined as specified research or experimental expenditures will be required to be capitalized and amortized ratably over a five-year period beginning with the midpoint of the taxable year in which the expenditures were paid or incurred.
- Bonus depreciation has been doubled to 100% and has been expanded to include used assets. This change is effective for assets acquired and placed in service after September 27, 2017 and before January 1, 2023. For property placed in service after December 31, 2022, the 100% allowance is phased down by 20% per calendar year.
- Section 179 expensing limit has been doubled to $1 million and the expensing phaseout threshold has been increased to $2.5 million.
- Qualified improvement property is now generally depreciable over 15 years without regard to whether the improvements of the property are subject to a lease or placed in service more than three years after the date the building was first placed in service.
- New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies, and S Corporations) and sole proprietorships. This deduction is available through 2025.
- New disallowance of deductions for net interest expense more than 30% of the business’s adjusted taxable income (exceptions apply).
- Section 199 deduction, also commonly referred to as the domestic production activities deduction, has been eliminated for tax years beginning after December 31, 2017.
- The rules regarding partnership technical terminations under Section 708(b)(1)(B) have been eliminated.
This is just a summary of the most significant TCJA provisions that will affect businesses engaged in real estate and construction. If you are interested in learning more about how these and other provisions of the new law impact you, please contact your tax advisor.