Effective tax planning for contractors centers around the ability to show a greater net worth on the contractor’s year end financial statement than on it’s tax return. The key to accomplishing this is to be able to accelerate deductions or defer income on the tax return. Therefore, year end tax planning coincides with a company’s profit planning for it’s year end financial statement. The financial statement is a major determinant in increasing bonding programs and banking credit lines so a healthy financial statement with a reasonable tolerance for taxes is the key ingredient.
Some ways to accomplish this are as follows:
Choice of Tax Method:
The Tax Cuts and Jobs Act (“TCJA”) increased the revenue threshold for utilization of the cash basis method for taxes to $25 million. A successful, sustainable construction business is ultimately about cash management. The cash basis method provides the contractor tax deferral and therefore the cheapest form of financing for their company.
Section 199A Deduction
“TCJA” introduced the “QBI” (Section 199A) deduction for specified businesses, including contractors. The 2018 filing season was our first chance to see how this new deduction would benefit our contractor clientele. Overall, the 20 percent qualified business income (“QBI”) deduction provided significant tax relief for eligible business owners. While planning ahead for the upcoming tax season, wage levels for the business can have a big effect on the “QBI” deduction since Section 199A is limited to 50% of W-2 wages.
Fixed Asset Planning
Two fixed asset planning strategies – Section 179 expensing and bonus depreciation – became even more valuable for business owners after tax reform. The Section 179 small business asset allowable expense limit increased to $1 million, with phase-out thresholds raised to $2.5 million. The definition of qualified property for commercial property was expanded to include roofs, HVAC and fire alarm systems. Bonus depreciation doubled to 100% and was expanded to include used assets, beginning with assets acquired and placed in service after 2017.
Research and Development
If you answer yes to any of the questions below, a construction company may be eligible for the research and development (“R&D”) tax credit, a dollar for dollar reduction against taxes currently owed or previously paid in the prior three years.
Does your company:
Develop new, improved or more reliable concepts, products, processes, techniques, or formulas?
Develop and/or implement new materials, technology or processes to improve project or internal efficiencies?
Design for LEED/Green initiatives?
Apply for patents?
Conduct environmental testing?
Test new technologies or products?
The R&D tax credit is available to businesses of all sizes, not just major corporations with research labs, and many contractors are eligible, with an expansive list of activities that qualify for the credit.
If you have any questions, please contact your Castellano, Korenberg tax professional.