Tax reform at the finish line
How the tax bill affects architects
Tax reform is now a reality. How did this effort come about? Congress has long recognized the need to reform our nation’s complex tax code. Beginning last September, Congressional leaders worked with the White House to generate a conceptual outline that would do just that. The legislative process moved with unusual speed, bringing a bill known as the Tax Cuts and Jobs Act to the House and Senate floors for a vote in late December. It was signed into law just before the holidays.
Overall, the bill provides generally lower tax rates for individuals. It also cuts corporate taxes from 35 percent to 21 percent. New provisions were added to provide tax relief for small businesses not organized as corporations. The revenue lost due to these tax cuts will be offset through eliminating many current tax incentive programs and letting the tax cuts to individual rates expire after several years. Still, the legislation is expected to add nearly $1.5 trillion to the deficit.
AIA’s stance on tax reform
The American Institute of Architects was engaged from the very beginning of the tax reform process to ensure fair treatment for architects and to make their voices heard. This work included providing updates and analysis to AIA components and giving AIA members the opportunity to weigh in with their legislators.
To be clear, AIA does not and will not take a position on the merits of the bill. This legislation will impact members of the architectural profession, and all Americans, in vastly different ways. Whether you are an individual, a small business or a large corporation, the impact of the legislation on your taxes depends on many factors such as the corporate structure of your firm, its income level, and its location. Furthermore, representatives of higher tax states have expressed reservations about new limits in the legislation on the deductibility of state and local taxes as well as mortgage interest. By not casting judgment on the bill as a whole the Institute gave AIA Members and Components the flexibility to make their own judgments about how the bill will affect them and their local communities.
Instead, the Institute focused its influence specifically on changing provisions in the legislation that would have a negative impact on architects. Through this focused effort, architects moved the needle in the right direction on several of the policies which will impact them and their work.
Fairness for architecture firms
In order to provide tax relief for pass-through businesses which are taxed at individual rates, the Tax Cuts and Jobs Act creates a new 20 percent deduction for these businesses to reduce their tax liability. However, both the initial House and Senate’s bills prevented architects from taking advantage of this provision. Instead it lumped them in with other service industries, ostensibly in an attempt to prevent tax avoidance. Since 57 percent of architecture firms are organized as pass-through entities, AIA argued to lawmakers that excluding architects from tax relief would treat them unfairly, putting them at a competitive disadvantage to other industries.
Thanks to intense lobbying by AIA members, architects and engineers were removed from the list of professions prevented from taking the new deduction in the final version of the bill. This means that architects will now be able to take full advantage of the tax relief being offered to other industries.
The Historic Tax Credit
The initial bill drafted by the House of Representatives proposed complete elimination of the Historic Tax Credit - despite more than three decades of success the program has had in helping finance rehabilitation projects supporting community economic development across the country.
Again, due to the outreach from AIA advocates and our coalition partners in the preservation community, that credit was largely restored in the Senate’s bill. The conference committee responsible for developing the final package wisely chose to follow the Senate approach and retain the Historic Tax Credit, albeit in a more limited form.
Under the Tax Cuts and Jobs Act, the 10 percent historic credit for all pre-1936 properties will go away, but the 20 percent credit for certified historic buildings will remain in place. This 20 percent credit can no longer be taken in the first year, and must instead be pro-rated over five tax years. These changes will reduce the effectiveness of the credit, but it is a far cry from complete elimination, which was on the table just weeks ago. Retention of an incentive for the preservation of historic places is a positive development in the face of the possibility that the credit could have been wiped away completely.
The Institute has also worked over the past year to see the 179D Deduction for energy efficiency in commercial buildings extended beyond its December 31, 2016 expiration date. This critical tax provision encourages investment in high-performing buildings, which is better for the environment and building owners’ pocketbooks, and serves as a lifeline for many architecture firms. Although 179D and other important energy incentives were ultimately left out of the final tax reform bill, the AIA is still working with our allies to extend 179D by other means. AIA has joined a group of organizations from across industries in calling for Congress to consider additional tax legislation to extend expired tax incentives like 179D.
Architects made their voices heard
AIA has been tracking many other aspects of this bill besides the three primary issues discussed here which could impact architects or the building industry. For more information about how the tax changes which could impact the profession, view this chart.
As our new AIA President, Carl Elefante, FAIA said: "We owe a deep debt of gratitude to our members for their efforts in reaching out to their elected representatives to make our views known and to make this legislation better for architects and the country. It's clear that the conferees listened to our members, who showed the power of our profession to effect change even when the obstacles to change are huge." Indeed, participation in the AIA’s Legislative Action Network jumped 20 percent in the weeks prior to passage of the legislation.
In summary, although this bill will impact every American differently, architects stepped up to the challenge and were able to improve provisions in this legislation which otherwise would have been quite damaging to the profession. Architects spoke up and made their voices heard, securing an outcome which recognizes the importance and influence the profession has in the United States and its economy.
Ian McTiernan is AIA's manager of federal relations