The House Ways and Means Committee began a formal markup this week of Congressional Republicans’ tax reform legislation, H.R. 1, the Tax Cuts and Jobs Act. AGC applauded the release of the long-awaited legislation last week, but noted specific concerns about the treatment of pass-through businesses (S-corporations, LLC’s, Partnerships, etc.) and the lack of infrastructure funding in the plan. AGC is asking you to contact your members of Congress and urge them to treat S-corps fairly as compared to C-corps and maintain incentives for public and private construction in tax reform.
Senate Republicans are expected to unveil their version of a tax reform bill today, Nov. 9, but as of publication had not done so.
The House legislation would make sweeping changes for the tax code, eliminating dozens of deductions and credits in exchange for lower rates and a much larger “standard deduction.” For a full summary and legislative text of the bill from the Ways and Means Committee see here and here. For construction priorities there are both good provisions and areas of concern:
- Repeal of corporate and individual Alternative Minimum Tax;
- An increase in the small contractor exemption from percentage of completion accounting to $25 million from $10 million;
- Estate tax exemption doubled, then repealed after 2023;
- Full expensing for the next five years, and expanded Section 179 expensing over the same time frame; and
- Reduced rates for individuals/pass-throughs/corporations
- Repeal of the Domestic Production Activities deduction (Section 199);
- Elimination of 1031 Like Kind Exchanges for equipment (real property is retained);
- No additional funding for the Highway Trust Fund;
- Elimination of tax exemption for Private Activity Bonds and the Historic Tax Credit;
- No composite plan model for multiemployer plans;
- Elimination of Work Opportunity Tax Credit; and
- Limitations on net operating loss carry back and carry forward.
The biggest tax-related concern, however, is how the legislation treats pass-through businesses. While the corporate rate is reduced to 20 percent, and the bill caps business income at 25 percent, it also proposes that 70 percent of pass-through business income for owners active in the business be treated as wages, subject to the individual rates, and 30 percent capped at the 25 percent rate. The net result is a blended rate of approximately 32 to 35 percent, plus payroll taxes for active owners of pass-through businesses. Additionally, “service businesses” are excluded from accessing the 25 percent rate entirely, with 100 percent of their income treated as wages. And while H.R. 1 includes an alternative method to calculate business income based on the amount of depreciable capital a business purchases, this method is currently inadequate in providing real tax relief for many construction firms.
An additional concern with the legislation is not only the absence of a permanent Highway Trust Fund fix but the termination of a key infrastructure financing tool – Private Activity Bonds (PABs). AGC continues to push for infrastructure to be included in the tax bill and in response to the absence of a Highway Trust Fund fix in the House bill, the AGC co-chaired Transportation Construction Coalition (TCC) sent a letter to Ways & Means Chairman Kevin Brady (R-Texas) underscoring the need to include a permanent solution to the Highway Trust Fund’s revenue deficit in tax reform. Further, AGC and other infrastructure stakeholders sent letters to the House Ways & Means Committee and the Senate Finance Committee expressing our disappointment that the House bill terminated the tax exempt status of Private Activity Bonds and requesting that, not only should PABs be maintained in a final tax bill, but they should be enhanced for transportation and water projects and a new category of PABs should be established for public buildings.
In addition, AGC has expressed its concerns with the repeal of the Historic Tax Credit, which would eviscerate the market for the rehabilitation of historic buildings that frequently have higher costs, greater design challenges and weaker market location. That credit has encouraged $131 billion in private construction investment since its inception. AGC will continue to push the House and Senate to include pro-infrastructure provisions as a part of a pro-growth tax reform legislation.
As the Committee has proceeded in the markup, AGC is working with Committee staff to improve the legislation so that it will have a greater benefit for the construction industry. While it is expected that the bill will be passed out of the Ways and Means Committee today, we expect further changes before it comes to the floor of the House of Representatives.
For more information, contact Matthew Turkstra at [email protected] or (202) 547-4733.