If you still are figuring out how the new federal tax law will affect your construction or real estate business, the good news is that the time spent should benefit your bottom line. The bad news is that your planning will be difficult because a lot still is unknown.
Accountants warn that there is no easy way to determine exactly what your benefits will be because the tax reform was not a simplification for many businesses. The benefits and how to best tap them will be as individual as each company, observers note. They further urge businesses to sort through their situations sooner than later.
“The stated goal was to simplify the tax code,” said Mark Heath of McKonly & Asbury LLP, an accounting firm with offices in Hampden Township and Lancaster County. “That certainly was not met, as far as businesses.”
Many companies started examining the changes before the ink was dry on the new law late in 2017, Heath and others said. That involved modeling – making a side-by-side comparison on the various options and what might be best for an individual company.
“Most are being proactive,” Heath said. “We really have been pushing our clients to be aware of everything. … Every company will have two or three things that will be a benefit but each will have a different two or three things.”
Some experts recommend that major, expensive decisions be postponed until there is further guidance from the IRS, which will spend 2018 and beyond writing regulations for the new law.
For example, there might appear to be strong reason to change your structure from a pass-through entity to a C Corporation, for whom the tax rate will fall to 21 percent. However, restricting can be costly. While it should be considered, depending on a company’s individual circumstances, it may pay to wait until regulations become clearer.
“There really are a lot of gray areas, still,” said Matthew Fox of Brown Schultz Sheridan & Fritz CPAs in East Pennsboro Township. “It’s pretty difficult to give advice with no regulations. It could be years before we have much of this sorted out.”
Fox said the American Institute of Certified Public Accountants has asked the government for more guidance on 39 different areas of the tax law. So far, the IRS has responded that it will have clarifications on 18 items by the end of June, Fox said.
Nevertheless, plan now, if you haven’t already started, he said. Some provisions will make sense to take advantage of right away, such as rules that will allow 100 percent depreciation on new – and also used – capital equipment.
“Take your time,” he added. “Talk to your tax adviser, and get the best advice you can get.”
It is basic advice delivered by every expert contacted for this article, including a tax attorney, Salvatore J. Bauccio of Harrisburg-based law firm McNees Wallace & Nurick LLC.
Study the law; be aware of your options; but don’t spend a lot of money on major changes, “because the regulations might undo what you just did,” Bauccio said.
“Don’t incur excessive expenses or rush until you have final regulations,” he said. But don’t wait to plan, either, he added. There are plenty of actions that should be taken this year, he said.
David Cross, owner of Mowery in Cumberland County, said officials with his construction company began working with tax advisers as the bill was being passed into law. While company officials have been making changes, they are being cautious.
“What we know is the provisions in the bill, but regulations have not been issued,” Cross said. “Regulators can take umbrage to parts of the law, and that clarification could determine the greater or lesser benefit.”
“I build stuff,” he said as a caveat. “I am not an expert tax guy.”
Still, he added, he expects the new tax law to be a significant benefit to his company.
Experts agree that two companies could be similarly structured, of similar size, with similar assets but approach the tax benefits from different angles.
“This has added layers of complexity that you never could have imagined,” said Paul D. Fisher of Boyer & Ritter LLC in East Pennsboro Township. “It’s an entirely individualized assessment. Two property owners essentially could be doing the same thing and could have two different answers.”
Where you get your income; how much debt you have and where it is; how you are currently structured; the capital expenditures you need to make this year and beyond; the wages you pay and how you pay them; and other considerations are all issues that will factor into what will be the best plan going forward, said J. Andrew Weidman with accounting and consulting firm RKL LLP, which has offices throughout the midstate.
“There are so many nuances that you can’t just focus on one part,” Weidman said.
For example, one part of the law – the 199A provision that could involve a 20 percent tax deduction – looks particularly attractive for S Corporations or other pass-through entities, but the rules are complex in order to take full advantage of it, he added.
“They are putting all kinds of brackets around these things,” said Weidman.
Five major provisions
The experts agree the major provisions of the new tax law that are worth studying and reviewing with your tax advisers include the following:
1. Structure: Experts advise to do some modeling to see whether your current corporate structure takes full advantage of the new tax law. However, they caution that changing the structure – say from a pass-through entity to a C Corporation to get the latter’s 21 percent tax rate – could consume time and money, and the final regulations have not yet been released. It doesn’t hurt to see what the current thinking can do for you, they say, but be careful about changing anything too soon.
2. 199A: On the surface, this could mean a 20 percent tax deduction for pass-through entities. However, there are numerous rules that could affect how you can get to that number, if at all. No one piece of advice will work, so tax experts advise that you meet with your accountant to go over what you should be doing differently to take full advantage of the opportunities. For example, how you pay wages and how your debt is structured might need to be changed.
3. Bonus depreciation: The new law offers generous incentives for buying equipment – up to 100 percent depreciation – for qualified new and used equipment that was bought after Sept. 27 and before 2023. However, the state of Pennsylvania has said it will not allow that depreciation on the state side of your taxes until the property is sold or disposed of, so that it something to be considered.
4. Entertainment: The deduction for business-related entertainment expenses is eliminated.
5. Bonus tip on REITs: Take a look at Real Estate Investment Trusts, or REITs. The new rules make them a more attractive investment, Weidman said.