Navigating Tax Strategy for Construction Firms

Small Business

The following article was provided by Whittlesey. It is reposted here with permission.

Year-round tax planning is crucial for construction business owners to maximize potential tax benefits. 

Formulating an effective tax strategy involves more than just understanding the credits and deductions your firm is eligible for but also considering other important factors. 

Here are some questions to consider regarding common tax issues for contractors. 

Are We Using the Proper Accounting Methods?

The method of accounting you choose directly influences when you report earnings from a project. 

Thus, it’s critical to validate this approach for every contract. Depending on your company size (in earnings) and the type and length of the contract, you may be able to select from several methods to align tax exposure with contract accounting.

Generally, most contractors utilize the percentage-of-completion method for long-term contracts, i.e., those not completed within the same fiscal year. 

Nevertheless, there’s usually a distinct method available for residential builders. 

Additionally, under the Tax Cuts and Jobs Act, previously exclusive tax accounting methods for smaller firms are now accessible to businesses with an average yearly gross income of up to $29 million (subject to inflation adjustment). 

Consult your CPA to evaluate all long-term construction contract accounting methods.

Are We Incorporating Contract Terms That Maximize Tax Benefits?

The specific clauses within a contract can shape tax-reporting necessities. 

Therefore, ensuring you’re integrating the most beneficial ones in every agreement to the best extent possible is essential. 

For instance, tax provisions in unit-price and gross-maximum-price contracts differ from those in lump-sum contracts.

Contract clauses that delineate payment conditions and initiation points, such as “pay if paid” and “paid when paid,” have diverse tax-reporting approaches. 

The retainage clause also has an impact on tax reporting. 

Since retainage is a portion of the contract value that the client retains until project completion, it can lead to deferred income recognition.

Are We Eligible for the Section 179D Deduction?

Entrepreneurs and government contract holders can avail themselves of the Sec. 179D deduction for incorporating energy-efficient upgrades into commercial or governmental properties. 

A tax reduction of $5 per square foot might be accessible to owners of new or pre-existing structures who integrate interior lighting, building envelopes, and HVAC or hot water systems that curtail energy and power expenditures by 50% or more. 

Any accumulated tax deductions from these properties might be able to be retroactively applied to the previous three tax years or rolled forward for up to 20 years. 

Designers and builders who meet certain criteria can also benefit from this deduction under a unique rule applicable to public property.

Can We Leverage Bonus Depreciation?

Make the most of this deduction while it’s still available. 

Bonus depreciation allows businesses to write off a significant proportion of the cost of eligible assets acquired in the year they’re put into use. 

According to the CARES Act, qualified improvement property that was operational between 2018 and 2022 was entitled to a 100% deduction. 

However, the phase-out of bonus depreciation commences this year. In 2023, taxpayers are restricted to 80% of the cost of eligible assets. 

This percentage is then planned to be decreased annually until it’s phased out completely after the 2026 tax year.

Do We Qualify for State Tax Credits or Other Incentives?

Don’t limit your attention to just the federal tax advantages your construction firm may be eligible for. 

State governments also grant tax credits and various incentives to promote development, restoration, and cleanup. 

An expert tax advisor can help identify the tax incentives available in your home state and assist you in figuring out whether and how your construction business can leverage these benefits. 

Are We Maximizing the Potential of Our Professional Advisors?

Comprehensive, year-round strategic tax planning demands involvement from individuals beyond your managerial staff and team members. 

Tax advisors can help you identify all the tax-saving opportunities available to your construction business.

About the author: Greg LaCasse is a partner in Whittlesey’s Holyoke, Massachusetts, office. He joined the firm in 2017 and has 30 years of experience in public and private accounting, including roles with the Big Four, as well as serving as the chief financial officer for an international IT consulting firm. 


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