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11/28/2017

Tax Reform Message from ACEC

Action Needed by You!

As you know, ACEC has had a major grassroots effort underway over the last few weeks in response to tax reform bills in the House and Senate that could disenfranchise large numbers of mid and smaller-sized engineering companies around the country. That effort has generated 4,500 contacts with House and Senate lawmakers so far, which has been critical in supplementing our lobbying efforts in Washington, but we need to continue to generate strong grassroots pressure to get the attention of lawmakers to the need to treatment firms of all sizes equitably. Please circulate this update to your members and direct them to our Action Alert Center to send letters to House and Senate offices. We are also targeting certain lawmakers in the House and Senate who have been particularly supportive over the years to our industry, and we will be following up with some of you individually to coordinate in this outreach.

A major part of the challenge is the speed at which Congressional leaders are pushing tax bills through the legislative process, where the goal of final passage before the end of the year appears to be more important than the substance of the reform. While we generally like the direction of the House and Senate bills in their treatment of larger engineering firms organized as C corporations, ACEC continues to have serious concerns over the treatment of engineering firms organized as "passthrough" businesses – S corporations, partnerships and LLCs. These types of businesses pay taxes through the individual tax filings of the firm owners, and are taxed within the applicable tax bracket for each owner. These firms also tend to be mid and smaller-sized firms and represent the bulk of ACEC's membership. For your reference, I'm attaching letters from ACEC CEO Dave Raymond to House and Senate offices that summarize our concerns. House Letter and Senate Letter

Both the House and Senate versions of the bill reduce the corporate tax rate from 35% to 20%, and the reduced rate is applied uniformly to all firms organized as C corporations, including engineering companies. Both bills preserve and maintain the ability of engineering firms to continue to use the cash method of accounting (where taxes are paid the year the firm is actually paid for delivering the service), as opposed to forcing firms to undergo the expensive process of switching to accrual accounting (where firms would be taxed the year the firm delivered the service), which was a critical ACEC priority going into this process.

The problems emerge in the bills' treatment of passthrough firms. The Senate bill, which could come to the floor this week, eliminates the current Section 199 domestic production activities deduction – which manufacturing, construction, architecture and engineering firms of all types qualify for and use -- and replaces it with a new 17.4 percent tax deduction available to all passthrough businesses. Initially the bill excluded most passthrough owners in certain professions from qualifying for the new deduction – lawyers, doctors, accountants, financial services, entertainment and sports celebrities, as well as architecture and engineering. In response to concerns raised by ACEC and other affected groups, the bill was modified in committee to allow engineering and other passthrough owners within this excluded group to claim the deduction for joint filers with incomes below $500,000 and individual filers with incomes below $250,000. According to various CPAs who work for engineering firms, this modification may cover a significant portion of engineering passthrough owners, but we remain concerned that the approach would leave many passthrough owners ineligible for the new deduction.

The House bill poses greater problems. Instead of a new deduction, the House bill creates a new tax rate of 25% for the business income of passthrough firms, but with the exception of very small passthrough businesses -- owners with incomes capped at $150,000 for joint filers and $75,000 for individual filers – engineering and the other "excluded" professions identified above are completely left out. We've made a strong case to the tax-writing Ways and Means Committee that excluding our industry from the reduced rate, together with the elimination of Section 199, would leave most engineering passthrough firms with a higher tax burden than they carry under current law.

That message is starting to resonate, but we need a continued strong grassroots push to reinforce our central message that all firms – regardless of firm size or tax structure – deserve equitable treatment in the tax code. Thank you for your attention and assistance, and please let me know if we can provide you with additional information.

Steve Hall

V.P. Government Affairs

ACEC


Advancing the Business of Engineering