Commentary
Why the Expiring Tax Break for Engineers Must Be Renewed
The section of the federal tax code known as 199a will expire at the end of 2025 unless Congress approves an extension. Its passage in 2017 represented one of the most important lobbying victories claimed by the American Council of Engineering Companies because the measure effectively cuts taxes paid by many engineering and architecture companies. As Congress faces other important issues in a tumultuous legislative session this year, it’s important to focus on money being saved via this complicated tax code section.
“With the law back on the table in Congress, it is critical that we protect these gains and also fix more recent issues,” ACEC Executive Vice President Steve Hall wrote last year. One needed fix involves restoring deductibility of R&D expenses—but for now Section 199a provides plenty to think about.
That part of the tax code provides a 20% pass-through tax deduction, which was meant to extend a lower tax rate for typical C corporations to many companies structured as S corporations—meaning they are companies that pass along the income and losses to their shareholders. The tax bill passed by Congress in 2017 bestowed one of its biggest and most controversial gifts—the deduction for pass-through revenue—on many U.S. professional service firms that are partnerships, sole proprietorships and S corporations.
The biggest design and consulting giants cannot claim the deduction. Pass-through companies known as “specified service trade or business” are only eligible for the 199a deduction if they fall below certain income thresholds. Above those thresholds, the deduction is subject to phase-out rules. Initially, Senate and House versions of the 2017 tax bill excluded from the deduction architects, engineers, doctors, lawyers, financial services firms and numerous other types of businesses. In previous tax measures, those types of companies were lumped together for tax purposes.
Expect opposition from anti-business tax advocates on Capitol Hill who believe the measure costs the U.S. treasury too much and helps the wrong kinds of businesses.
Engineering groups lobbied key congressional committee members, noting that the treatment of engineers under the tax reform measure was inconsistent with another tax code section that recognizes their “integral role in facilitating capital investment” and, therefore, qualifies them for the proposed pass-through tax benefit. With the American Institute of Architects’ support, the lobbying worked. Determining the deduction is often complicated, but it saves money.
Industry firms can expect opposition from anti-business tax advocates on Capitol Hill who believe the measure costs the U.S. Treasury too much and helps the wrong types of businesses and individuals. We believe engineers do facilitate capital investment, among other things, with many small engineering companies whose gross profits fall far below those acceptable in other industries that now enjoy favorable treatment in Washington, D.C. In a year of uncertainty ahead, keeping this deduction should be a high construction and engineering priority.
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