Tax Changes Coming for Real Estate and Construction Companies

Real estate and construction industry tax planning insights for 2022 and beyond

There are some new and potential tax changes on the horizon that will likely impact real estate and construction companies. Most of the changes are not beneficial to the taxpayer, so it’s important to begin planning now to potentially minimize the tax burden.

1. Bonus Depreciation

   Starting in 2023, bonus depreciation sunsets from the current 100% accelerated depreciation (80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026). If your business has a large amount of shorter-lived assets, this could start to impact the company’s tax bill as soon as next year. It may be worth considering what purchases can be accelerated into the 2022 tax year.

2. Net Investment Income Tax

   There has been some talk in Washington, D.C. about making active income (that of a real estate professional) subject to the 3.8% Net Investment Income Tax. This has been mentioned a few times now, so if there does end up being a tax bill this year, this would be something to watch out for. The taxes would be imposed on adjusted gross income in excess of $400,000.

3. Net Operating Losses

   Starting in 2021, there were some new limitations related to Net Operating Losses (NOLs) and excess business losses. These rules were part of the 2017 Tax Cut and Jobs Act but were deferred due to COVID under the CARES Act. For 2022, there is a $540,000 (married filing jointly) loss limitation for current year business losses to offset other income in addition to a limitation on NOL use in future years. NOLs carried forward are limited to 80% of income.

4. Cost Segregation Studies

   Cost segregation studies could be a good option to offset some of the above issues. Substantial tax and cash flow savings can be achieved by taxpayers who properly classify their construction or acquisition costs between real and personal property. Even with bonus depreciation sunsetting, the shorter depreciation lives could still be beneficial to your business.

5. Section 163(j) – Business Interest Expense Limitation

   With interest rates continuing to rise, it may be a good time to re-evaluate if the Real Property Trade or Business Election is needed. For 2021, the limitation on interest expense deduction without an election was 30% of adjusted taxable income (EBITDA for 2021). It also should be noted that the definition of adjusted taxable income changes starting in 2022 to NOT include an addback for depreciation and amortization.

The Keiter Real Estate and Construction Industry team will continue to share tax savings and planning opportunities on new and changing regulations. If you have questions on these or other corporate tax regulations, please contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000.