Tax Reform and the Impact on the Design and Construction Industry

President Donald Trump and Congressional Republicans released a plan for tax reform, entitled Unified Framework for Fixing Our Broken Tax Code. The impacts of the proposed tax reform will have impacts on the design and construction industry.

The proposals face significant scrutiny and debate before actual legislation is addressed by Congress. Leading democrats wasted little time attacking the plan, on the basis it would benefit the wealthy at the expense of the poor and the  middle class.

“The tax framework released today marks a promising step forward for the first genuine reform of the tax code in a generation. ABC is encouraged by the proposal, and we strongly support the tax reform process moving forward,” said Michael D. Bellaman, president and CEO of Associated Builders and Contractors (ABC).

“The framework and its targets go a long way toward advancing ABC’s tax policy goals. Construction historically faces the highest effective tax burden of any industry. The vast majority of construction firms are small and family-owned businesses that pay taxes at individual rates,” Bellaman said. “The equivalent rate reduction envisioned in the framework for businesses on both sides of the code, paired with a broader tax base, moves toward ABC’s vision of fair treatment for all companies regardless of size, structure or sector.

“While the framework is an important first step, there is much work to be done. Before this process can move forward, Congress must pass a budget resolution that instructs tax writers to turn this framework into legislative language. With so much left to the discretion of the committees, there is little time to spare. We look forward to working with both chambers to build on the structure of this framework in a way that promotes simplicity, fairness and economic growth.”

According to the American Institute of Architects (AIA), the organization supports comprehensive tax reform that broadens the base, lowers rates, and maintains parity among corporate and pass-through entities. However, the AIA issued cautions on the tax reform proposals advanced by the Trump administration and Congressional Republicans.

“Any tax reforms must do three basic things: support and strengthen small businesses, which account for the vast majority of U.S. architecture firms; encourage innovative, economically vibrant, sustainable and resilient buildings and communities; and treat all taxpayers fairly,” said AIA 2017 President Thomas Vonier, FAIA.

The corporate tax rate would be significantly cut to 20%, from 35%. The number of  individual tax brackets would be cut from 7 to 3, with tax rates of 12%, 25% and 35%, compared to a top rate of 39.6%, according to an analysis by the Tax Foundation.

Smaller design and construction firms stand to benefit as the pass-through tax rate for businesses would be limited to 25%. This would positively impact pass-through entities, such as sole proprietorships, partnerships and S-corporations, that are taxed at individual, not corporate rates. This tends to have an adverse effect on smaller design and  construction companies.

“It is encouraging that the proposal retains the low income housing tax credit, because that is good public policy. So is maintaining fair tax rates for thousands of small and family-owned businesses organized as partnerships or Subchapter S Corporations — that is the majority of U.S. architecture firms,” Vonier said. “However, many of the details necessary to judge this proposal fully are lacking. Recent analyses suggest that some architecture firms could be treated unfairly, simply because they provide ‘professional services.’

“By lowering the pass-through rate, the plan will reduce the tax bill of thousands of small businesses and help to spur job and economic growth,” said Granger MacDonald, chairman of the National Association of Home Builders (NAHB). In an appearance on CNBC, NAHB’s CEO Jerry Howard said that we have to “look as the tax reform plan holistically.” In an interview won Power Lunch, he said “…the actual stated commitment to the housing sector as a key to economic and social fabric of our country…makes this a very intriguing plan.”

According to Cushman & Wakefield’s Bob Knakal, tax reform could be a boon to the commercial real estate market. By cutting corporate tax rate, companies can hire more people, which could spark a demand in commercial office space. “The question is, what are the trade-offs that would allow those cuts to come?” he asked on Fox Business. He stated some key provisions could negatively impact the commercial real estate industry such as suggestion to eliminate the real estate owners’ ability to deduct business interest on their debt.

“[It’s] really the round-house punch that could really hurt the industry,” Knakal said. “All businesses, but especially commercial real estate, rely on debt. And if that interest is no longer deductible it could really be negative for commercial real estate.”

“This is the beginning of what is going to be a complex process,” says Dave Bauer, American Road & Transportation Builders Association senior vice president. Bauer He says he doesn’t expect the final product to look like what has been proposed.

“There’s a lot of unanswered questions here,” says Steve Hall, American Council of Engineering Companies vice president of government affairs. “And that list gets longer the more we look and think about it.”

According to Voiner, the AIA is also concerned about how  the design community could be impacted by cutting tax breaks. “The proposals also leave open the possibility that tax policies promoting good design could be eliminated,” he said. “This includes historic building tax credits, which have done so much to preserve the legacy of American architecture for future generations. We also want to maintain incentives for sustainable design, like the 179D energy-efficient commercial buildings tax deduction, which we know creates jobs, saves money, and helps the environment. Tax reform is about more than abstract numbers; these policies have real impacts on small businesses and communities.”