Updated: Apr 21
Working in the construction industry requires meticulous attention to tax details when you have to invest in tax planning throughout the year to minimize the taxes. Mostly profitable construction companies have relied on several provisions to reduce their tax liability, all of which are completely legal. If you’re planning your tax strategies year-round, here is a look at the top techniques you can take into consideration. You can get the most benefit from these tax strategies while staying in compliance with IRS requirements.
Select the Appropriate Accounting Method
For each contract, contractors have to choose the right tax reporting method by determining which projects are defined as long-term (more than a year) under IRS Code 460. Most contractors use the percentage of completion (PCM) for long-term contracts in which income and expenses are recognized during the period incurred during the period instead of deferring them to the end of the project. Sometimes, contractors qualify to use the completed contract method (CCM) if a least 80 percent of the estimated total contract costs for the year are for homes or other dwellings with four or fewer units.
Take Advantages of The Section 199 Deduction
Section 199 Deduction provides tax incentives for businesses to increase production and employment in the United States. However, currently updated the bill has expanded the deduction to include businesses engaged in construction. Contractors can deduct up to 9% on their tax - which can be a significant boon for small businesses that face strict tax rates.
Qualify for a research and development (R&D) tax credit
Construction companies also employ R&D tax credit if their construction-related activities that can qualify include design improvements for LEED or energy-efficient projects, development of unique construction methods and processes, experimentation with building materials, or developing or improving construction equipment.
The credit is designed to incentivize contractors to innovate in construction techniques and products that contribute to economic growth. If your companies qualify for these innovation activities, you can employ R&D credit to get 12% tax savings in this area back to your business.
Defer Profits or Retainage
If a project is due to start close to the end of the year, a contractor is able to defer the recognition of gross profit on all jobs that are less than 10% complete at year-end. For long-term projects, contractors use the percentage of completion method that allows them to defer 30% of the profit on contracts until the year projects are completed and they can defer retainage until it’s received.
Pay Attention to Common Small Deduction
To make the most of each return, construction companies should pay attention to the common deductions to maximize the impact. The most common deductions for construction companies include:
Travel: You can obtain travel deductions that are directly work-related, including time spent traveling from site to site, traveling to meet clients or others(tool runs, materials delivery, etc).
Asset Deductions: Construction companies typically qualify for the two types of asset deductions: immediate and depreciated. Immediate deductions are for assets such as cars, trucks, salaries, and tools with a short lifespan. Depreciated assets include long-lasting equipment or machinery, which you can deduct over a long period of time.
Small Deductibles and training deductions
These commonly missed tax strategies can provide you with significant tax savings. Due to the complexity of these tax strategies, some contractors prefer to hire a tax specialist to help them secure the highest possible return.
If you’re looking for a tax specialist who understands the intricacies of contraction, contact us for a free consultation on which strategies are best to implement for your situation.