Qualified Business Income Deductions Impact on the Construction Industry

By Melissa Liu and Ben Kettle, Harris CPAs

Have you been looking for ways to save your company money on income taxes? Working with your CPA’s at Harris to conform to the new eligibility requirements of the Tax Cuts & Jobs Act (TCJA) could help you save up to 20 percent! This savings sounds great, but qualifying for these deductions has become complex with TCJA.

TCJA has both drawbacks and benefits for construction companies. For instance, this regulation eliminated a 9% Domestic Productions Activities Deduction (DPAD) for businesses. Though this may negatively impact many businesses, the potential benefits of this regulation outweigh the disadvantages.

TCJA Section 199A was enacted to help pass-through entities remain competitive with new tax regulations favoring C-Corporations. Pass-through entities include:

  • Sole-Proprietorships
  • Partnerships
  • S-Corporations

Section 199A gives your pass-through construction business a competitive advantage by reducing its Adjusted Gross Income by a 20-percent margin. To qualify for Section 199A, two components are required:

  • They must have Qualified Business Income (QBI),
  • And they must have salaried, or W-2 eligible, employees

QBI and Qualified Business Income Deductions (QBID) are complex, fortunately, the construction industry falls under the QBI umbrella.

Having W-2 eligible employees could result in added expenses compared to 1099 employees, but the purpose of the deduction was to help these pass-through entities. Extra expenses incurred, such as Social security payments, unemployment insurance, and benefits, among others could be mitigated, or at least reduced, with QBID.

There are limitations of Section 199A based on wages and capital of the entity. For example, allowable deductions can only be 50 percent of paid W-2 wages, or 25 percent of those wages plus 2.5 percent of the book value of acquired property used by the business.

Because of these complexities, the IRS added an up-to-date frequently asked questions section to their webpage. For more information on the specifics of QBI, you can follow this link to the IRS website.

Working with your CPA and ensuring this pass-through structure is right for you could help you realize a significant savings in your tax bill. Being proactive and strategic planning could have a huge impact for your business, yourself, and your employees.

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