Tax Reform Impact on A&E Industry
The Tax Cuts and Jobs Act (H.R. 1) is the biggest tax overhaul in over 30 years. With such an extensive revision of the tax code, the Architectural and Engineering industry will be deeply affected by these changes. Below are the key areas that will impact the industry.
- A number of credits and business incentives either remain or have been enhanced. Owners of flow through entities will get a 20% deduction from domestic qualified business income. The preliminary draft provided an exclusion of this 20% deduction for all service providers. However, lobbyists from A&E associations scored a last minute win to specifically allow architects and engineers to get this deduction.
- C corporations (non pass-through) can now enjoy a flat 21% tax rate, down from a maximum rate of 34%. Corporate alternative minimum tax (AMT) has been repealed. This reduction in tax rate may prompt business owners to re-evaluate their business entity structure. While changing business structures may be a complex process, there are potential significant tax saving opportunities in doing so.
- The research and development (R&D) credit has specifically been left on the table with a slight calculation modification. This credit is effectively 13% or 20% (depending on election taken) of the incremental increase in qualified research and development costs over a base year period. Because of the decrease in the corporate tax rate, there is a built in 20% additional benefit for C Corporation who take advantage of R&D credit.
- Bonus depreciation, which allows the writing-off of qualified fixed assets based on a certain percentage in the first year placed in service, has been temporarily increased to 100% as opposed to the previous 50%. Also, used properties will now qualify for bonus depreciation.
- Section 179 expensing, which also allows taxpayers to write-off qualified fixed assets, has also been enhanced. Taxpayers can now deduct up to $1 million of fixed assets with an investment limitation of $2.5 million. Previously, they were only allowed to deduct $500K with an investment limitation of $2 million.
- The rehabilitation credit, a 20% credit to be ratably claimed over five years based on qualified rehabilitated buildings expenditures, is available.
- Domestic Production Activity Deduction (DPAD) has been repealed. This was a 9% deduction on qualified domestic business taxable income.
- Net interest expense is capped at 30% of adjusted taxable income. The excess interest expense can be carried over indefinitely. However, exceptions exist for small businesses with gross receipts of $25 million or less.
- Generally, no deduction will be allowed for entertainment. Previously, taxpayers were allowed to deduct 50% of those expenses. Employer operated eating facilities are only 50% deductible as opposed to previously being 100% deductible.