A 2019 Outlook on Taxes for Construction and Real Estate Businesses

A summary of Technical corrections, Tax extender Provisions and Retirement Changes in the Construction and Real Estate Industry

In Washington, tax proposals, policies, and procedures are always top of mind. While not as significant and comprehensive as the Tax Cuts and Jobs Act (TCJA), there are still several tax bills brewing now in Congress.

Each of these bills is different, but there are items in each that could impact contractors and real estate companies. Among the proposed legislation circulating in Congress now, the following tax bills will receive attention this year and have a good chance at being enacted:

• Technical Correction Items from TCJA
• Retirement Changes and IRS Reforms
• Tax Extender Provisions

Here is a brief overview of each bill and the prospects for passage this year.

Technical Correction Items from TCJA

There are several provisions from the TCJA that were inadvertently miswritten when the legislation was drafted. There is general agreement in Congress that there were drafting errors, but there is no agreement on how to fix them. Congress must still pass a bill to remedy the  errors, and the fix needs bipartisan support.

One of the major technical correction items that impacts many businesses, especially real estate companies and contractors, deals with the “Qualified Improvement Property” (QIP).

QIP was intended to be entitled to 100% bonus depreciation under TCJA and thus would permit full write-offs in the year of improvement. However, the QIP drafting error results instead in depreciation over 39-years.

Tax Extender Provisions

Over the past few years, there has been an odd collection of tax provisions that have had a short “shelf-life” (a useful life of one to two years). Congress has dealt with these provisions on an annual basis, usually occurring late in the year. These are often referred to as “extender items,” as Congress annually addresses whether these measures should be extended for another year or allowed to lapse. Frequently the extensions are retroactive. The latest batch of extenders expired at the end of 2017.

There is strong support in the Senate to pass these extenders in 2019 (and to do sooner rather than later), but there is only lukewarm backing in the House. If they are extended retroactively for 2018, taxpayers may need to go back and amend their 2018 tax returns to claim the tax credit or other incentive if they have already filed. It is uncertain whether any extender legislation will pass in 2019, and if so when.

Please Note
Some key extender items for real estate businesses and contractors include a unique deduction for those that design energy-efficient buildings and special fuel credits.

Click here for a summary prepared earlier this year regarding the various extender items.

Retirement Changes and IRS Reform

With a new Congress in session, retirement legislation was re-introduced as the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act of 2019 (H.R. 1994), which was first approved by the House Ways and Means Committee and now passed the House on May 23, 2019 by a wide margin. The bill has also bipartisan support in the Senate.

Since few bills receive significant bipartisan support, contractors and real estate companies should look for this retirement bill to eventually be enacted into law this year (probably this summer). Here are several key proposals in this House retirement bill:

• Repeal of the maximum age of 70½ for traditional IRA contributions (beginning for tax years in 2020)
• Revised rules concerning election of “safe harbor” Section 401(k) status
• Penalty-free withdrawals from retirement plans for individuals in case of birth of a child or an adoption (can avoid 10% penalty)
• Increase in age for the required beginning date for mandatory distributions from 70½ to 72 (effective in 2020)
• Modifications of required minimum distribution (“RMD”) rules for designated beneficiaries – a new ten-year distribution payout period on death of the IRA owner
• Retirement plan adopted by filing due date for year may be treated as effective as of close of year – the current rule is the plan must be set up by end of plan year

There are many taxpayer-friendly changes in this retirement proposal, but keep in mind nothing is final yet. A description of this legislation from the Staff of the Joint Committee on Taxation (JCT) in Congress can be found here.

Also omitted in TCJA were changes in the IRS and how it operates. There was a bipartisan effort in Congress to make some major IRS reforms, but this too failed to get adopted in 2018 and was carried over to 2019.

Earlier this year, the IRS reform bill, the “Taxpayer First Act of 2019,” navigated through the House, again with bipartisan backing. There is currently strong support for IRS reform in the Senate, so this legislation is likely to be adopted and signed into law later this year. There are a variety of changes in this IRS reform bill. Please click here for a description of this proposed legislation by the Staff of the JCT.

There are other tax law changes that have been proposed. Many of these will fall by the wayside, but some may move forward and perhaps be added to one of the proposed bills noted above. Construction and real estate businesses should continue to keep an eye on the tax developments from Washington. Please consult your Sikich tax advisor with any questions.

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