Tax Reform and Your Construction Business

Several provisions of HR 1, entitled “Tax Cut and Jobs Act” now being marked up in the House Ways and Means Committee, will have specific effects on construction businesses.:

• Sections 3101 and 3102 – immediate expensing of equipment purchases.

• This will greatly help small construction businesses whose growth often depends on the availability of capital to finance additional purchases of new equipment. It is disappointing this is only a temporary 5 year provision.

• Section 3202 – unlimited business interest deduction for small businesses.

• This is very helpful for financing large equipment investments, and somewhat mitigates the effects of only making sections 3101 and 3102 temporary.

• Section 1004 – pass through taxation of 30% of income at 25% rate regardless of business owner’s personal bracket.

• This helps recognize that a significant percentage of earnings of smaller construction businesses represents a return on the owner’s considerable investment in capital.

• However, the exclusion of “professional services” from this relief could complicate matters for professional land surveyors, as well as general contractors working under “construction management fee for service” agreements.

• Section 4303 “border adjustment tax” on imports.

• Since material cost is approximately 40% of the cost of both residential and commercial construction projects, this provision will significantly increase the cost of construction to end users by 8% across the country, due to the 20% price increase of lumber from Canada, Portland Cement from Mexico, drywall from China and steel from Europe and Japan.

• Section 1302 and 1303 state and local tax deduction restrictions.

• These restrictions will have a major downward effect on the nationwide housing market, both by directly curtailing construction of high end single family homes, and the resulting indirect effect of restricting market availability of homes for which the mortgage interest deduction remains available because owners of those existing homes will be discouraged from moving up to houses in the $500,000.00 to $1,000,000.00 price range.

The Senate is working up its own version of tax reform legislation, which will need to be reconciled with the House version in conference committee before any bill can be passed and sent to President Trump for signature, so it is difficult to predict in any detail what a final law might look like. However, these are the provisions most likely to impact the construction industry. Watch the proceedings carefully, and write your Congressman and Senators.