2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

After the Tax Cuts and Jobs Act (TCJA) was signed in 2017, accounting professionals inched forward without much clarity. Proposed regulations and IRS guidance slowly trickled in, in a manner similar to constructing a building; there were change orders, evolving building codes, and a “pseudo building inspector” in the IRS that was difficult to reason with. The constant change has been a consistent topic of conversation as questions continue to plague construction contractors and further guidance continues to get issued. THE “NEW” TAX LAW: CONSTRUCTION CONTRACTOR EDITION

ENTITY CONSIDERATION 2018 was a year to reassess contractors’ business models and tax strategies. The tax threshold for small contractors was raised, and the opportunity for a change in tax method or the tax treatment of contracts was presented. A contractor who falls below the $25 million average gross receipts threshold is now defined as a “small taxpayer,” allowing them the option to use the cash method or completed contract method of accounting, in addition to the accrual method. The $25 million threshold, which will be adjusted annually for inflation, is a significant increase from the previously static $5 million threshold for C-corps and $10 million for other entities. Cash Method n Gross profit for tax purposes follows the cash flow of the contract.

Completed Contract Method n Gross profit for tax purposes is deferred until the contract is substantially complete. In July of 2019, the IRS republished regulations allowing taxpayers the option not to aggregate gross receipts of related parties for 2018 and 2019. Filed 2018 tax returns should be reviewed to determine if there is an opportunity for tax savings by using the cash or completed contract method. A contractor’s entire business portfolio must be considered when analyzing average gross receipts. Contractors are required to aggregate gross receipts of certain “brother/sister” entities with common ownership, as well as certain “parent/subsidiary” relationships.

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