Note: This article was published to promote the TCJA; however, at the time of publication, the U.S. Treasury had not yet issued proposed regulations explaining the changes in detail. Some information contained here may be outdated.

When the conferees got together to combine the House and Senate bills they took some of the best provisions from the House bill regarding the construction industry. Here is a list of some of the significant business and individual changes affecting contractors in the Tax Cuts and Jobs Act.

Tax Rates Reduced
For contractors doing business as a C corporation, the rates are decreased to a flat 21%, from the top rate of 35%, for taxable years beginning after January 1, 2018. Corporations with a fiscal year that straddles December 31, 2017 will have a blended rate. For owners of pass-through entities and sole proprietors, the top individual rates are also decreased from 39.6% to 37%. The initial proposals called for a simpler rate structure, but the final bill left the number of brackets unchanged at seven with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The changes in individual rates and the other individual changes are not permanent and are set to expire after 2025.

Small Contractor Exemption
The small contractor exemption is increased from $10 million to $25 million. This is the threshold that partly defines which contractors are allowed to use a method of accounting other than the percentage-of-completion method for their long-term contracts as long as the contract is expected to be completed within two years. Effective January 1, 2018, only those contractors with average gross receipts over $25 million are required to use the percentage-of-completion method.

The $10 million threshold established in 1986 was never increased for inflation, so this is a welcome change. The Senate bill called for an increase to $15 million, so this is a pleasant surprise for small contractors and will allow those contractors with average gross receipts between $10 million and $25 million to account for their long-term contracts under their established exempt method. Exempt methods, for example, could include the completed-contract method or the contractor’s overall accounting method such as the cash, accrual, or accrual less retention methods. 

Contractors affected by this provision would change methods on a cut-off basis. In other words, any contract started before 2018 would continue to be accounted for on the percentage-of-completion method and any new contracts that begin in 2018 would be accounted for under the exempt method. 

More Relief for Small Taxpayers
Other gross receipt thresholds in the law that are used to determine who must use the accrual method of accounting and account for inventories are also increased from $10 million to $25 million. This change will benefit subcontractors that have inventories with average gross receipts under $25 million that previously were required to use the accrual method.