2019 Year-End Tax Guide

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

Most contractors, engineers, and architects will fall into the former category--qualified TOB--where the section 199A deduction is limited to the minimum of: n 20% of qualified business income. n 50% of all wages paid (note: accurate reporting of wages is crucial). n 25% of wages plus 2.5% of unadjusted basis of “qualified property.” The term “specified service trade or business” (SSTB) covers a wide range of business activities including, but not limited to: health services, consulting, law, accounting, performing arts, and financial services. Engineering and architecture activities are specifically excluded from the definition of a SSTB and qualify as a TOB. Members of an SSTB may qualify for the deduction, with the same considerations of a qualified TOB, but only if their taxable income is less than $315,000 for joint filers with a complete phase-out at $415,000 ($157,500 and $207,500, respectively, for all other filers). FINAL THOUGHTS There are still a plethora of questions awaiting answers in the form of IRS guidance or a “technical corrections” bill, but at this time there is little hope anything will be signed before the end of 2019. Contractors should continue to seek the advice of their trusted advisors in regards to any additional clarifications or concerns.

identical to the aforementioned “$25 million small contractor” exception mentioned above. Being considered a small taxpayer on the entity level does not necessarily remove a taxpayer from the Section 163(j) limitation. The following pro rata items should be included on a schedule K-1 so that the limitation can be recalculated by the taxpayer: Entities not subject to section 163(j): n Three year average of the entities gross receipts n Current year adjusted taxable income n Current year business interest expense n Current year business interest income Entities subject to section 163(j): n Excess business interest expense n Excess taxable income n Excess business interest income If no Section 163(j) information is included on a schedule K-1 received by a contractor, the question should be raised when completing the taxpayer’s filing. QUALIFIED BUSINESS INCOME DEDUCTION With the Section 199A qualified business income (QBI) deduction, individual taxpayers (not including C corps) are allowed to deduct up to 20% of domestic QBI derived from certain trades or businesses. The QBI deduction is calculated on an individual level utilizing information provided on the Schedule Cs, Schedule Es, and Schedule K-1s. Section 199A is broken into two categories - -a qualified trade or business (TOB), and a specified service trade or business.

A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service, to the extent there was no business income limitation. The Section 179 maximum deduction has been increased to $1 million, with the dollar-for-dollar phase-out threshold starting at $2.5 million. The definition of section 179 property has been expanded to include qualified improvement property (QIP). Roofs, HVAC systems, fire/ security systems and nonstructural improvements are some improvements that fall under the QIP category and qualify for Section 179. Unfortunately, most states decouple from the federal laws. It is vital as part of a tax return to consider the state implications of the federal depreciation elections. As of January 1, 2018, all large taxpayers (individuals, pass-through entities and C corps, alike) are subject to the Section 163(j) business interest expense limitation. Taxpayers subject to Section 163(j) will be required to limit any net business interest expense exceeding 30% of the entity’s adjusted taxable income (ATI). A small taxpayer exception exists that is INTEREST EXPENSE LIMITATION

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