Tax Planning for Construction Businesses

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by Advice Chaser
by Advice Chaser
silhouette of people standing on tower crane during night time

Construction businesses are a backbone of communities: they build the homes and offices the whole community uses to live and work. But many construction business owners don’t have a good blueprint for tax planning. Educating yourself about your tax options and hiring a financial advisor to help are great ways to manage your tax burden more effectively.

You might already hire an accountant to help you at tax time. But filing time is far too late to make much difference in the tax you owe. Planning in advance to lower your tax burden can save you thousands.

Accounting Methods

One influential decision you’ll need to make is how to record your earnings. You can record your earnings when you earn money, when you’re paid, or when a whole project is complete. Depending on the situation, one of these options may reduce your taxes. Keep in mind that whichever method you use for recording profits, you will also use for recording expenses. But you may use different methods for short-term projects than you use for long-term methods.

Not all of these options are available for every business. Larger businesses have more restrictions, and keep in mind that regulations may change from year to year. Speak with your financial advisor about which methods apply to you.

1. Cash method

With this method, you record income whenever the customer pays you. So if a project includes some payment up front and some later, you’ll record each at the time you receive it. You can’t defer payments by putting off cashing the check—if they’ve written the check and given it to you or to someone else to give to you, you have to record that profit this year, not wait until it’s a new year before cashing the check.

2. Completion-percentage method

Here, you’ll divide the total payment you’ll receive for a whole project by the percentage of the job you’ve finished. So if the total cost of a project is one million dollars, and you did 50% of the expected work this year, you record a profit of $500,000 this year. Likewise, you can write off 50% of the expenses you’ve undertaken for this project.

3. Completed contract method

Using this method, you’ll realize all profit and expenses for a project only when the entire project is complete. The advantage of this method is that it puts off taxes on projects as late as possible. But on the downside, it can result in uneven profits from year to year, bumping you up into a higher tax bracket the year a large project is completed.

Deductions for Construction Businesses

Construction businesses qualify for all kinds of tax deductions, but plan ahead. Many deductions will only be available to you if you both carry out the necessary action and keep adequate records of it. Your accountant can’t pull a transportation deduction out of thin air if you didn’t keep track of your mileage! So here are a few things to do to maximize your available deductions in your 2021 taxes.

  • Energy-efficient buildings

You can earn a deduction of up to $1.80 per square foot when the buildings you construct are energy efficient.

  • Work opportunity tax credit

You can earn a tax credit if you hire certain categories of employees, often people who struggle to find work: ex-felons, qualified veterans, and more. 

  • Empowerment zone tax credit

You earn this by hiring employees who live in a federally designated empowerment zone.

  • Depreciation deduction

Your construction equipment depreciates a little every year, and that depreciation can be deducted on your taxes. Construction equipment is legally given a useful life of five years, which means you can deduct the full cost of the equipment long before it actually becomes useless. Keep good records of what you purchase and when, as well as any repairs you make.

  • Transportation deduction

You can’t deduct the cost of traveling to and from work, but you can deduct travel from one worksite to another. That includes gas, parking, wear on your vehicle, and more. While you can keep track of all transportation-related costs, it may be easier to take the standard per-mile deduction. If you plan to do that, all you need to do is record every mile you travel for work.

Start Planning Your Tax Year Now

The earlier you start planning for your taxes, the more money your construction business can save. A financial advisor is a crucial resource in making your tax plan. Contact us to connect with an advisor knowledgeable about the ins and outs of construction businesses and their tax burden.

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