By Dennis Boo, CPA, PARTNER – Member of Withum’s Architecture and Engineering Group
The Tax Cuts and Jobs Act of 2017 (“Tax Act of 2017”) is finalized. The contents are garnering a lot of discussion, and clearly there are many changes coming in 2018. The scope of this article is to headline a couple of the changes that will directly affect architect and engineering firms.
EFFECT ON PASS THROUGH ENTITIES
Current Tax Law
Currently, owners of pass through entities, which include sole proprietors, S corporations, and partnerships, are required to report their allocable share of the business income on their individual income tax returns.
New Law
Since C corporations are getting a tax break in the Tax Act of 2017, both the House and Senate bills sought to level the playing field so pass through entities would not be disadvantaged. The resulting legislation will allow sole proprietors, shareholders of an S corporation, and partners of a partnership to claim a deduction against their allocable share of income from the pass through entity. Some specifics are as follows:
- The deduction is equal to 20% of the owner’s allocable share of income from the pass through entity.
- The 20% deduction will be limited to an amount equal to 50% of the company’s W-2 wages allocable to the owner (this limitation does not apply to owners whose taxable income is less than $157,500 for single filers and $315,000 for married filing jointly).
- An alternative limitation may be used, and is calculated as 25% of the company’s W-2 wages allocable to the owner plus 2.5% of the unadjusted basis of property used in the business (generally this is the original cost).
- The deduction is taken on the owner’s individual income tax return
Additional limitation on personal-service providers. Certain personal-service providers (namely accountants, attorneys, physicians) are subject to a phase out of the deduction when their taxable income reaches $157,500 (single) or $315,000 (married filing jointly). The phase out is complete at $207,500 and $415,000, respectively. So these professionals’ ability to claim the deduction will be largely limited.
The good news for architects and engineers is they were specifically excluded from the definition of “personal-service providers” in the new law and therefore are not subject to the limitations imposed on personal-service providers. This is a big tax benefit to architects and engineers as they will only be subject to the bulleted provisions outlined above.
EFFECT ON SECTION 199 – DOMESTIC PRODUCTION ACTIVITIES DEDUCTION
Current Tax Law
The current tax law allows taxpayers to claim a deduction equal to 9% of the lesser of the taxpayer’s taxable or qualified production activities income subject to a limitation of 50% of W-2 wages paid by the taxpayer in a calendar year that are attributed to domestic production gross receipts.
New Law
The Tax Act of 2017 repeals Section 199. According to the Unified Tax Reform Framework, the Domestic Production Activity Deduction would no longer be necessary after the tax rate reduction and other tax-reducing initiatives take effect.
For more information, please feel free to contact one of our Architecture and Engineering Group team members.
Dennis Boo, CPA, Partner
Member of Withum’s Architecture and Engineering Group
dboo@withum.com
(P) 407.849.1569
(C) 407.304.6753