One year ago, Congress approved and President Trump signed into law the Tax Cuts and Jobs Act (TCJA), the most sweeping reform of the tax code since 1986. In preparation for the tax reform debate in Congress, NRCA worked to educate lawmakers regarding how federal tax policy affects the roofing industry. As Congress drafted and debated tax reform legislation, NRCA encouraged lawmakers to lower tax rates for all types of businesses.
Most changes took effect Jan. 1, but NRCA continues to fight for the roofing industry until implementation of all remaining changes are complete.
NRCA has long advocated for a more realistic cost-recovery policy regarding the treatment of roof systems in the tax code. During tax reform proceedings, NRCA supported provisions to expand the definition of qualified real property eligible for full expensing under Section 179 of the tax code to include improvements to nonresidential roof systems. This allows taxpayers who qualify for Section 179 to immediately expense the cost of qualifying property rather than recovering costs over multiple years under current depreciation schedules.
The TCJA also expanded the expensing limits under Section 179, with the maximum amount a business may expense now set at $1 million and the phase-out threshold increasing to $2.5 million. These new limits are effective for qualifying property placed in service in taxable years beginning after Dec. 31, 2017.
With this change enacted under the TCJA, any improvements to nonresidential roof systems, including full roof system replacements on existing buildings, now can be expensed in the year of purchase by any taxpayer eligible to deduct expenses under Section 179. For more information and strategies for informing existing and potential customers of this more favorable tax treatment for nonresidential roof systems, visit www.nrca.net/0118-tax-law.
Protecting pass-through businesses
Another key priority for NRCA was to ensure tax reform would reduce tax rates for all types of businesses, including corporations and businesses organized as pass-through entities. Maintaining a degree of parity in tax rates among varying business structures also was important. In preparation for tax reform, NRCA became a steering committee member of the Parity for Main Street Employers (PMSE), a coalition formed for the purpose of representing pass-through businesses. Through PMSE, NRCA helped influence the debate within Congress regarding the complex mechanisms involved with tax policy concerning these types of businesses.
NRCA was pleased to see the TCJA reduce the corporate tax rate from 35 to 21 percent and reduce the individual tax rates that apply to pass-through businesses. In addition, NRCA supported the new 20 percent tax deduction for qualified business income (QBI) for many pass-through businesses under section 199A. This new deduction effectively further lowers the individual tax rates for such businesses to provide parity between corporate and pass-through entities. The reductions in tax rates will enable all types of roofing industry businesses to retain more of their hard-earned income and provide additional capital for reinvesting in employees and operations.
Although the decrease in the corporate tax rate was straightforward, the 199A deduction for pass-through businesses is quite complex. Its implementation requires guidelines determined by the Department of the Treasury and the IRS to establish methods of calculating the deduction and clarifying what does or does not qualify as QBI.
In March, the PMSE submitted comments to the Department of the Treasury and IRS as the agencies set out to create draft rules surrounding implementation of the QBI deduction under Section 199A. In the comments, NRCA called for "aggregation" to be permitted, which would allow taxpayers to group activities conducted through S corporations and partnerships when calculating QBI eligible for the deduction under Section 199A. NRCA and allied groups contend aggregation is vital to ensuring the deduction is fair and workable for business owners.
Allowing taxpayers to aggregate legal business entities together for this purpose would ensure pass-through businesses are not penalized based on how they are organized for business purposes, as pass-through businesses often use multiple legal entities for nontax business reasons.
For example, family businesses often are organized in a "brother-sister" structure, where their operations are housed in one entity and their real estate is in another. Another common practice is for a business to place all its payroll, finances and insurance in a "common paymaster" entity to streamline payroll operations while housing actual production operations elsewhere.
Absent aggregation, application of the Section 199A deduction would treat similar businesses differently based on how they are organized. Failure to allow aggregation could force many affected businesses to reorganize into C corporations, which would impose significant transaction costs on the businesses.
In August, NRCA was pleased to see draft regulations proposed by the Department of the Treasury and IRS providing for aggregation in a broad range of circumstances. In comments submitted through the PMSE available at www.nrca.net/tax-reform-comments, NRCA praised the agencies for permitting aggregation and acknowledging a well-constructed aggregation policy is an essential foundation to making the Section 199A deduction practical for pass-through entities. The comments also provided the results of a detailed economic analysis of the TCJA that illustrate the importance of broad aggregation rules to ensure the Section 199A deduction provides for a degree of parity between pass-through businesses and corporations.
The proposed rules put forward by the Department of the Treasury and IRS allow taxpayers to group together separate legal entities for purposes of aggregation only if they meet five specific conditions. In the comments, NRCA and PMSE expressed strong concerns these conditions were overly restrictive and explained how the conditions could be impractical and preclude many pass-through businesses from using the Section 199A deduction. NRCA recognizes the need for regulations to ensure only QBI receive the Section 199A deduction, but the association also notes it is essential the final regulations adequately allow for the use of the deduction by businesses in the spirit in which it was intended by Congress.
At press time, the final rules for the Section 199A deduction still are pending. The rules are expected to be released this month or early in 2019.
NRCA remains committed to its goal to ensure federal tax policy allows roofing industry employers to grow existing businesses and start new businesses to provide family-sustaining jobs for their employees.
This column is part of Rules + Regs. Click here to read additional stories from this section.