As the year draws to a close, it’s crucial for construction and contracting companies to take stock of their financials and plan ahead. The right tax strategies can help reduce your liabilities, improve cash flow, and position your business for growth in the new year. Below are PriceKubecka’s key year-end tax tips tailored for small to mid-sized construction firms.
1. Review Your Accounting Methods
Choosing the right accounting method can have a significant impact on when and how your income is taxed.
- Cash Method: Recognize income only when it’s received, providing flexibility to defer taxes.
- Percentage of Completion Method: Useful for longer projects, this method spreads income recognition over time, smoothing your tax burden.
- Completed Contract Method: For shorter projects, deferring income until completion can provide tax benefits.
Tip: Consider consulting with PriceKubecka to explore if switching methods could lower your taxable income.
2. Maximize Equipment Deductions
If you’ve purchased or financed equipment this year, take full advantage of available deductions:
- Section 179 Deduction: Write off the full cost of qualifying equipment in the year it’s placed in service.
- Bonus Depreciation: Deduct 60% of the cost of both new and used equipment for immediate tax relief.
Tip: Plan equipment purchases before year-end to capture these deductions early.
3. Defer Income and Accelerate Expenses
If you’re considering any significant purchases in the first couple of months of the new year, it might be beneficial to move those purchases into 2024 to maximize tax advantages.
- Prepay Subcontractors or Supplies: Early payments can also reduce your liabilities.
- Use Credit for Expenses: Charge business expenses to a credit card now and pay off the balance in the new year to capture the deduction.
4. Leverage Retirement Plans for Savings
Setting up or contributing to retirement plans offers dual benefits: tax savings and a secure future.
- 401(k) Plans: Contributions are tax-deductible, and matching funds build employee goodwill.
- SEP IRAs: Simple to establish, these plans allow higher contribution limits for small business owners.
Tip: Make contributions by the end of the year to maximize deductions.
5. Utilize Construction-specific Tax Credits
- R&D Tax Credit: If your company develops new building techniques or materials, you may qualify for this credit.
- Energy-Efficient Building Deduction (179D): Claim deductions for sustainable upgrades and energy-efficient designs.
Tip: Review project records, ideally a CPA that specializes in construction to identify overlooked credits.
6. Consider a Cost Segregation Study
If you’ve invested in real estate or large-scale renovations, a cost segregation study can accelerate depreciation deductions. Reclassifying certain building components allows you to write off costs faster, freeing up cash flow for reinvestment.
Tip: Conduct the study as soon as possible after purchasing, constructing, or renovating a property to maximize depreciation benefits in the current tax year. Even if the property was acquired in a prior year, a retroactive study can still unlock savings by allowing you to “catch up” on missed depreciation without amending past returns.
7. Evaluate Entity Structure for Tax Efficiency
The right business structure (LLC, S-Corp, etc.) plays a key role in your tax liabilities.
- S-Corporations: Pass-through taxation can reduce self-employment taxes.
- LLCs: Offer flexibility to choose how profits are taxed—either as a sole proprietorship, partnership, or corporation.
Tip: Review your entity structure annually to ensure it’s aligned with your long-term tax strategy.
8. Take Advantage of the Work Opportunity Tax Credit (WOTC)
If your company has hired or is considering hiring veterans, ex-felons, or individuals from other targeted groups, you may qualify for the Work Opportunity Tax Credit (WOTC).
- Veteran Employees: Hiring eligible veterans can result in tax credits ranging from $2,400 to $9,600 per employee, depending on their circumstances.
- Ex-Felon Employees: If you’ve hired individuals who meet the criteria as ex-felons, you may qualify for a credit of up to $2,400 per qualified worker.
Tip: Ensure proper documentation and submit Form 8850 to your state workforce agency within 28 days of the employee’s start date to claim the credit.
9. Ensure Compliance with Tax Regulations
Construction companies face complex tax rules, including multi-state compliance and payroll taxes.
Tip: Again, working with a CPA firm like PriceKubecka that understands construction-specific tax regulations is the best way to avoid costly penalties.
Why These Tips Matter to Your Business
Proactive year-end tax planning can set your construction company up for success, helping you minimize liabilities and improve financial stability. Whether it’s optimizing deductions, leveraging credits, or re-evaluating your entity structure, the right strategy ensures you enter the new year on solid financial ground. Partnering with a tax professional who understands the unique challenges of the construction industry is essential to maximizing your savings and staying compliant.
With decades of experience in developing tax strategies for construction clients, PriceKubecka provides a strong financial foundation that allows businesses to flourish. CONTACT US to schedule a consultation and learn how we can support your construction business’s financial success.