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The New Tax Law & Your Construction Business

The Tax Cuts and Jobs Act (TCJA) brought the most significant changes to our country’s tax law in over thirty years when it was signed into law on December 22, 2017. Most of the changes in the new law first applied to 2018 tax returns, so it’s our first chance to really see its impact. Since December of 2017 there have been several notices and regulations clarifying the new tax law, but further guidance is still needed in many areas. In this article, we’ll take a look at some of the key issues impacting businesses, particularly those businesses in the construction industry.

Qualified Business Income (QBI) Deductions Clarified

TCJA introduced a new deduction under IRS Code Section 199A for up to 20% of an eligible taxpayer’s qualified business income (QBI). Final regulations clarifying Section 199A were released in late January. The deduction, which is not available to C corporations, is calculated based on the qualified business income of each trade or business, subject to limitations based on wages and fixed assets. If the individual taxpayer’s taxable income is under $157,500 ($315,000 married filing jointly), the taxpayer is not subject to these limitations.  

Aggregation

The final regulations added the option to aggregate at the entity level, reducing the reporting obligations of the taxpayer. This is welcome news for many contractors, as it is common in the construction industry to have multiple entities for different geographic regions or service lines.

Aggregation can also be done at the individual level, allowing a taxpayer to combine activities that would otherwise be limited from taking the deduction. This individual level of aggregation now allows a taxpayer to combine wages and assets to maximize the QBI deduction. This aggregation will also simplify the new tax return disclosures required under the Tax Cuts and Jobs Act.

Assuming the individual taxpayer’s taxable income is in excess of the thresholds, the 20% deduction is limited based on a percentage of the entity’s wages and/or fixed assets. The final regulations also allow the entity to include wages of common law employees paid by another entity. This could be a significant benefit for related entities that may have differing ownership or those who use staffing companies, certainly something seen often in the construction industry.

Planning Opportunities

It’s also important to carefully analyze other planning opportunities and pitfalls. It will generally be beneficial for partners to take distributions in lieu of guaranteed payments since guaranteed payments don’t qualify for the 20% deduction. Also, entities will need to monitor the level of any consulting or other specified service income within an otherwise qualified trade or business. Specified service income over thresholds could cause an entire trade or business to be disqualified.

Bonus Depreciation and Section 179 Changes

Most owners of construction companies can never have enough equipment! Many of these businesses are smart and buy new equipment for economic reasons and not for tax reasons. If it’s necessary to buy new equipment to grow your company, some changes in bonus depreciation can really pay off. In fact, we’ve seen an increase in activity in the buying and selling of construction companies because this same rule applies to equipment acquired when you buy a new construction business.

The TCJA expanded accelerated depreciation, increased the Section 179 limits, and allows for 100% bonus depreciation on both new and used property. There are not any limits on the amount of bonus depreciation that can be taken, but Section 179 is still limited by the asset acquisitions of the taxpayer as well as taxable income. Qualified Improvement Property, a new class of property, includes nonresidential improvements to the interior of a building. Qualified Improvement Property is eligible for Section 179 depreciation, but currently is not eligible for bonus depreciation due to technical oversights when the TCJA was drafted. 

Meals and Entertainment Deductions: Not What They Used to Be

In the past, taxpayers could deduct 50% of the costs of business-related meals and entertainment expenses. The new tax law has eliminated any deduction for entertainment-related expenses. In general, the 50% deduction remains for most business-related meals, and the 100% deduction for employee social and recreational meals still exists.

Ohio Municipal Income Tax: Easier Filing

Beyond the federal tax law changes, there have also been significant changes to Ohio municipal income taxation. This was the first filing season allowing business taxpayers to file a single, combined municipal income tax return instead of filing separate returns for each city. This is a welcome change for contractors working in communities across Ohio, eliminating the need for potentially dozens or maybe hundreds of separate filings. Before a business can begin filing a combined return, it must first make a one-time election and notify each of the cities within 60 days of the beginning of their tax year. Businesses with a December year end would have had to file the election by March 1, 2019 in order to be able to file a combined 2019 return.  

The application of the new tax law can be complicated for both individuals and businesses. It’s safe to say we can expect to see more clarifications from the IRS in the months ahead. While the Tax Cuts and Jobs Act simplified tax filing for some of the most basic tax returns, many taxpayers and businesses are likely to struggle to digest and apply the new law now and for some time to come.

CPA Mary Jo Pitzen contributed this article. It was also published in the May 2019 edition of the CFMA Northwest Ohio Ledger, the organization's online newsletter. Mary Jo is a senior tax manager at Gilmore Jasion Mahler, LTD. She is a member of the firm’s Construction & Real Estate Specialist Team. Mary Jo is also a member of the Northwest Ohio chapter of the Construction Financial Management Association (CFMA) and the Toledo chapter of The National Association of Women in Construction (NAWIC).

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.  

GJM Building New Maumee Office

Rendering courtesy of: SSOE

 

Gilmore Jasion Mahler has purchased a building in Maumee’s Arrowhead Park and work is underway to transform it into the firm’s new Toledo area headquarters. The property at 1785 Indian Wood Circle will offer more space to accommodate GJM’s growth in recent years and allow for future growth as well. A rendering of the new GJM Maumee headquarters shows a dramatic transformation of the current structure, which many familiar with Arrowhead Park may know as the former Eaton training center. The new GJM office will feature a striking glass façade built onto the east side of the building.

 

Designed by architectural firm SSOE, the new office is 24,000 square feet, compared to GJM’s current office at 1715 Indian Wood Circle, which is only 17,000 square feet. It will include offices with several open office areas, conference rooms and a number of collaboration zones, which will offer tucked away areas with comfortable seating for informal collaborative work. The building will also feature a café, learning center and wellness room.

 

“From the very beginning this project has been about creating a new office that reflects what our staff wants,” says Firm Administrator Itzel Krauss. “We heard that natural light is important, so we incorporated the glass façade and will add more windows on the west wall of the building. We also decided to keep the offices more internal so that the employee work stations will be more on the perimeter and have more exposure to natural light.”

 

The firm has encouraged staff input on many of the decisions related to the new building, including its location. Staff members have also given input on many of the amenities and features in the building including lighting, height-adjustable work stations, necessary storage, and features in the café, to name a few. Staff members are also helping to select desk seating by testing out three possible new desk chairs for comfort, ease of use and support.

 

“Who better to help us create this office than our staff? We’ve leased space for years and we thought it was the right time to purchase our own building and put our own unique GJM stamp on it,” says Managing Partner Kevin Gilmore. “We’ve always said we’re not your stereotypical CPAs. As we embrace innovation in our own firm, it’s exciting to build an innovative work space as well. These next few months will be exciting as we all see things take shape.”

 

Working closely with SSOE’s architect and interior designer on the interiors, American Interiors and ELEVATE Interior Construction is coordinating interior design work including furniture and pre-fab interior construction. Maumee-based Program Solutions Group is the construction manager & general contractor. Demolition at the site started in late April with an anticipated move to the new building by the fall of 2019. Gilmore Jasion Mahler has made other moves through the years responding to growth. Originally in office space at One Seagate, the firm added a location on West Central Avenue before consolidating to the current location in Arrowhead Park in 2003. In that time the firm has grown to over 100 people in two offices.

 

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities

The Easy Way to Avoid the Gift Tax

A financial gift can be a big help, but its important to know the tax impact. When does the gift tax apply, what is it, and who pays it?

GJM CPA Charlie Heid tackled the topic in his monthly appearance on WTOL Your Day. 

The gift tax is a tax on money or property that one living person gives to another. Probably the most important thing to know when it comes to the gift tax is the dollar figure $15,000. For 2019 that’s the annual exclusion amount… in other words that’s the amount of money you can gift to a single recipient without having to report the gift. If you stay at or below that threshold, you’re not required to file a gift tax form 709 to the IRS. If you go over that $15,000 you need to file a form and you’re eating into your annual lifetime exemption.

That annual exclusion is per recipient. So, say for example that you have three kids, and they are all buying their first homes this year, you could gift each one of them $15,000 to help with their down payments without incurring the gift tax or having to file the form.

The gift tax applies if you’re gifting to your children or any other family members or friends. But there’s an exception: your spouse.  

Here’s where the gift tax doesn’t apply:

  • A financial gift to your spouse
  • If you’re paying tuition or medical expenses directly to a hospital or school for another person
  • A gift to a political organization for its use
  • A gift to charity

The person who is doing the gifting is the one to assume the tax impact, if there is one. The recipient of the gift doesn’t owe any tax.

Good tax planning strategies can help you avoid paying the gift tax. First and foremost, don’t go over that $15,000 limit in gifting to any one person during the tax year.

If you’re married, you can essentially double the amount you can gift to $30,000 with no tax impact… because one $15,000 gift could come from you and another $15,000 gift could come from your spouse.

Another strategy is to spread the gift out over a couple of tax years. For example, if you want to give your daughter $25,000 at the holidays, you can do it in two separate checks… one in December for $15,000 and then another check after the New Year for $10,000 for a total of $25,000. That way the gifts will apply to different tax years. 

If you exceed the $15,000 limit in one tax year, you would have to file a gift tax return, or a Form 709 to the IRS, but more than likely you won’t have to pay any gift tax because we all have a lifetime exemption we can “eat into” before having to pay any tax. $11.4 million is the lifetime exemption for 2019. That’s the amount of value in money and property that each US citizen can give away during their lifetime. 

CPA Charlie Heid is a partner specializing in tax services who joined Gilmore Jasion Mahler in 2002. He serves clients across many industries, with a focus on manufacturing & distribution. Charlie appears monthly on WTOL-TV to discuss tax and money issues.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

Business & Succession Planning

You've worked hard to build your business, but there is a critical piece you can't ignore. What happens once you retire? Thinking you have an idea of how it will go isn't the same as coming up with an official strategic plan for the future. Experts say most business owners know how important it is to have a succession plan, but few actually have one in place. Gilmore Jasion Mahler partner Deanna Hall says she is having this important discussion right now with many of her clients.

 

Deanna Hall is a tax partner with Gilmore Jasion Mahler who advises many businesses on tax strategy and other critical business decisions. Her area of specialty is manufacturing & distribution.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm's professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

Tim Schloz Joins GJM Team

Tim Schloz Gilmore Jasion MahlerGilmore Jasion Mahler recently welcomed a new member to the team. Well, he’s not exactly new as you’ll see when you read this Q&A with GJM’s Tim Schloz.

What is your title? Risk Advisory Manager

Describe your role at GJM: My role consists of helping clients in the areas of information technology (IT), enterprise resource planning (ERP) system implementations, business process and IT process designs, and internal controls over financial reporting.

When did you start at GJM? March 25th was my first day back at GJM!

Anything you’d like to share about your past professional experience? I worked nearly four years at a large public accounting firm serving clients in the IT audit and business process control testing space. I spent a lot of my time serving publicly traded companies helping them understand and optimize their IT and business process risk profile through numerous audits, and post and pre-implementation assessments. In college I had three internships with GJM in the tax department.

Why did you choose the accounting industry? Accounting is the language of business. I learned and found it very important early on that in order for a business to be successful, one must understand the ins and outs of accounting. After taking a few classes in high school and college I found accounting to be a great fit along with information systems. The two majors really complemented each other as we are truly experiencing an innovative time in the accounting world! 

Why did you specifically decide that GJM was a good fit for you? After completing my first internship with GJM, I really got a great sense of the culture, fun, and family atmosphere. I knew one way or another I would make my way back to GJM. With a growing risk advisory practice and a great team, I knew GJM was now the perfect fit for me.

Are you from the Toledo area originally? If not, where are you from? Born and raised in the Toledo area.

What do you like about living in Northwest Ohio? Northwest Ohio is really a unique place. Its big enough to suit all your needs and wants, but then small enough to get to know the community. There has been a revitalization in the area the past few years which is really exciting to watch and take part in. I also have several family members in the area and really find the area appealing and a great place to call home.

Where did you go to school? University of Toledo

Would you like to share any info on family, pets, etc.? I have two cats, Behr and Boston! They are brothers and really have two different, unique personalities.

How do you like to spend your free time? I enjoy the outdoors, whether its running, biking, playing golf, basketball, volleyball and occasionally swimming.

Are you involved in any community organizations, do any volunteer work? Is there a particular cause you feel strongly about? If so, why? I have recently been active with the United Way, Salvation Army, and Junior Achievement. I am looking to join a nonprofit board in the near future.

Favorite song or music? I am all over the place with music, but I enjoy a mix of current pop, country and techno.

Favorite book or movie? “How to Win Friends and Influence People” - Dale Carnegie

What is something people may be surprised to find out about you? Born and raised in Toledo, but a passionate Chicago Cubs fan. Go Cubs go!