Tax Reform: Choice of Entity Considerations

The Tax Cuts and Jobs Act tax reform bill passed in December 2017 represents the biggest change to U.S. tax policy since the 1980s. With wide sweeping changes to both the corporate and individual tax systems, changes wrought by the bill’s passage certainly do not bypass the construction industry. However, the specific impacts will depend upon the structure of the business and the nature of its operations.

Construction businesses that currently operate as C corporations will be most affected by the following changes to the tax code:

• Reduction in the corporate tax rate
• 100% bonus depreciation deduction
• Elimination of the corporate AMT
• Modifications of rules for use of certain accounting methods
• Limitations on interest expense deductions

Several of these changes will also affect pass-through entities, either S corporations or Limited Liability Corporations taxed as partnerships (including General Partnerships, Limited Partnerships, or Limited Liability Partnerships). In addition, there are also considerations that directly affect flow-through structures, including the deduction for qualified business income (Section 199A deduction).

With so many significant changes to the tax environment for construction companies, now is the time for company owners and stakeholders to take a hard look at their chosen business structure. In cases where the company is considering a new entity type, thoughtful consideration, analysis of net effective rates, and proactive planning are essential prior to making a final decision.

HBE’s Construction Industry Specialty Team specializes in helping clients identify the best entity structure for minimizing tax liability and maximizing profits. If you are a construction company owner or stakeholder and would like more information about how to successfully navigate the new tax environment and improve your bottom line, please give our office at call at (402) 423-4343.