Masonry Magazine August 1987 Page. 17
TAX REFORM
THE NEW TAX LAW WILL HAVE A SIGNIFICANT IMPACT
UPON MASON CONTRACTORS. THIS ARTICLE DEALS WITH
SOME OF THE SPECIFICS.
by Robert Feinschreiber
Margaret Kent
Tax reform has now become law. These changes are so substantial that they constitute a new tax code, the first in 32 years. These tax changes are likely to benefit mason contractors. However, there are many detrimental features in the new law, and these adverse provisions may possibly override the favorable provisions.
Corporate Tax Rates
The primary benefit from the new law is the reduction in corporate tax rates. Even here, the tax saving is not what it seems. The new tax law reduces corporate tax rates, but only for very profitable businesses. A corporation with income of $25,000 or less realizes no rate reduction or tax saving. A corporation with income of $50,000 saves only $750. The new standard corporate tax rate is 34 percent, compared with 46 percent under the prior law, but the tax rate reaches 39 percent when income is between $100,000 and $335,000.
Here is how the new corporate tax rates compare with the prior tax rates:
INCOME
(thousands) | Old Rate | New Rate
---|---|---
0-25 | 15 | 15
25-50 | 18 | 15
50-75 | 30 | 25
75-100 | 40 | 34
100-335 | 46 | 39
335-1000 | 46 | 34
1000-1405 | 51 | 34
1405 plus | 46 | 34
Business Meals
The new law has tightened the standards for deducting business meals, and has reduced the amount allowable. These provisions have an adverse impact on masonry construction companies.
Now, only 80 percent of business expenses for food and beverages are generally deductable. Moreover, stringent criteria must now be met. The meal expenses must be ordinary and necessary business expenses, and the meal must take place in an atmosphere conducive to a business discussion. Also, you must discuss business before, during, or after the meal.
Under the prior law, it was sufficient if you and your meal guest had a business relationship. There was no requirement that you discuss business during, before, or after your meal. In other words, you could take a client to lunch just to touch base and see if he was generally happy with your product or your service, or to discuss generalities of the business world. Now, the business connection requirement necessitates that there be a bona fide business discussion associated with your business.
Needless to say, you cannot deduct meals that are considered lavish and extravagent. The 80 percent rule applies after you eliminate this excess. Let's assume that you spend $150 for lunch and the IRS decides that $60 is the acceptable amount. You may deduct 80 percent of $60, $48, not the entire $60. What is lavish and extravagant is largely up to the IRS, but you had better be prepared for stricter substantiation of even a $25 tab, as the Treasury has been instructed to adopt stricter substantiation requirements.
If you reimburse meals for your employees, they can deduct 100 percent of the business meal as long as all the other requirements mentioned above were met. You, the employer, are then subject to the 80 percent rule.
Capital Expenditures
The new tax law sharply discourages capital expenditures by a masonry construction company for equipment and facilities. Under prior law, these assets qualified for investment tax credits or large depreciation deductions, or both. Now, the investment credit is repealed and depreciation is reduced.
Real estate investments are especially hard-hit. An office building is now depreciated over a 31½ year period using the straight line method, so the annual writeoff is about 3 percent of the building cost. Until recently, buildings qualified for an annual writeoff that was nearly twice as great.
Automobiles
Many mason contractors use one or more cars as part of their business. They are adversely affected by the repeal of the investment tax credit and the slowing down of depreciation on automobiles.
The new tax law discourages the purchase of medium
continued on page 41
MASONRY-JULY/AUGUST, 1987 17