Tax planning is a key part of managing cash flow and keeping more of what you earn. Many contractors know they need to stay on top of taxes but are often too busy to plan ahead. The truth is, most tax-saving strategies have hard deadlines, usually before December 31. But not all hope is lost. There are still several ways contractors can reduce their tax bill after the year wraps up. Here are six actionable strategies to consider now:
1. Reevaluate Your Accounting Method
Contractors have options when it comes to accounting methods and switching to a more tax-friendly one can lead to big savings. The IRS allows for both automatic and nonautomatic method changes. Automatic changes like moving from accrual to cash accounting or excluding retainage, can still be made after the year ends. Review your current accounting methods, especially for:
- Long-term contracts (POC vs. completed contract). We’ll dive deeper into this method further down.
- Inventory capitalization
- Prepaid expenses
- Overhead allocation
Changing accounting methods might require IRS Form 3115, but the potential tax deferral (or acceleration, depending on your goals) can be worth it. It’s often a great tool to smooth income or improve financial metrics used in bonding decisions.
2. Adjust the Tax Percentage on Long-Term Contracts
Long-term contracts (those spanning multiple tax years) must be reported using the percentage-of-completion (POC) method for tax—but not exactly the same way as under GAAP. The IRS requires overhead costs like SG&A to be included in job costs for tax purposes, which can increase the estimated costs to complete and result in a deferral of income.
This isn’t optional, it’s required. However, contractors can still analyze and apply these adjustments after year-end but before filing. Even small percentage adjustments on large contracts can significantly impact taxable income.
3. Review Reporting Methods for Short-Term Contracts
Some contracts don’t need to follow POC rules. Contractors often mistakenly lump all projects under POC when some could be reported differently.
Same-Year Contracts:
If a project starts and finishes within the same year, it may be accounted for under the overall method (cash or accrual), which could offer more favorable tax treatment.
Less Than 10% Complete:
Projects less than 10% complete at year-end may be excluded from POC reporting. No special election is required. You just need to apply the rule correctly before filing.
4. Revisit Depreciation Methods and Elections
Depreciation is one of the most overlooked areas for post-year-end tax savings. Even if you’ve already filed or are close to it, reviewing your depreciation schedules and elections can yield benefits:
- Bonus depreciation (still available for qualified assets, though phasing down)
- Section 179 expensing
- Units of production method vs. straight-line for equipment-heavy operations
You may also be able to revise depreciation schedules for prior years via Form 3115 to catch up on missed deductions.
5. Consider a Cost Segregation Study—Even for Prior Year Purchases
If you own property—like offices, yards, or warehouses—a cost segregation study can accelerate depreciation by identifying shorter-life assets within the property. This can significantly increase your deductions and improve cash flow.
Even if you bought the property in a prior year, it’s not too late. A study can be completed up to three years later, with the depreciation adjustment applied in the current year through an accounting method change.
6. Maximize Retirement Contributions Through Profit Sharing or Cash Balance Plans
One of the most overlooked ways to cut taxes while planning for the future is through retirement plan contributions.
Profit Sharing Plans:
These allow employers to contribute up to 25% of compensation, often on top of existing 401(k) contributions. Contributions are tax-deductible and can significantly reduce taxable income.
Cash Balance Plans:
For high-earning contractors looking to put away more than traditional plans allow, cash balance plans are worth a look. They’re considered defined benefit plans and allow for much higher contribution limits—often into six figures annually. These plans can be adopted and funded after year-end (by the extended tax filing deadline), giving contractors flexibility to evaluate their financials first.
Don’t Leave Money on the Table
Construction companies operate in one of the most complex industries from a tax and financial reporting perspective. But with complexity comes opportunity. Reviewing these areas—even after year-end—can unlock valuable tax savings and strengthen your financial statements for bonding and lending purposes.
If you’re unsure where to start, a CPA firm that specializes in construction (like us) can guide you through these opportunities. You might be surprised how much flexibility still exists—and how much money you can save—with the right post-year-end planning. CONTACT US today to get started.