Strategic Tax-Planning Q&As for Your Business
To maximize their tax savings, business owners need to plan year-round. Strategic tax planning is about not only knowing which credits and deductions your company can claim, but also minding other important details. Here are some questions to ask yourself — and answers to consider — about just a few important tax issues for contractors:
Are we applying the right accounting methods? The accounting method you use determines when you must report project revenue, so you should double-check the method on a contract-by-contract basis. Depending on your business size (in earnings), and the contract type and length, you may be able to choose from several methods to align tax payments with contract revenue.
Most contractors are required to use the percentage-of-completion method for long-term contracts — that is, those not completed within the same tax year they were entered. However, residential builders can typically qualify to use a different method.
Also, under the Tax Cuts and Jobs Act, tax-accounting methods previously available only to smaller construction businesses can now generally be used by companies with average annual gross receipts of up to $26 million (as adjusted for inflation). Ask your CPA for help reviewing all the accounting methods for long-term construction contracts.
Are we using tax-beneficial contract provisions? The provisions of a contract can impact tax-reporting requirements, so make sure, to the extent possible, you’re incorporating the right ones in each contract. For example, unit-price and gross-maximum-price contracts have different tax provisions than lump-sum contracts.
Contract provisions outlining payment terms and payment triggers, such as “pay if paid” and “paid when paid,” also carry different tax-reporting methods. The retainage provision affects tax reporting, too. Because retainage is a percentage of the contract price that’s withheld by the owner until completion, it can delay recognition of income.
Could we qualify for the research credit? Often referred to as the “research and development,” “R&D” or “research and experimentation” credit, this tax break is available to qualifying construction and real estate businesses. It all depends on whether you’ve developed new processes to either improve efficiency or reduce/eliminate uncertainty in U.S.-based projects.
The research credit is generally taken on a dollar-for-dollar basis on the entire qualified job or the portion that meets IRS criteria. If not fully used, the credit may be carried back to the previous year or carried forward for up to 20 years. Under certain circumstances, start-ups and small businesses that don’t have income tax liability can use the credit to offset payroll taxes. Claiming the research credit involves careful documentation; be sure to work with a professional tax advisor.
Can we (or property owners we work with) claim the Section 179D deduction? Business owners and government contractors can take the Sec. 179D deduction for energy-efficient improvements to commercial and government buildings. A tax deduction of $1.80 per square foot may be available to owners of new or existing buildings who install interior lighting, building envelopes, and HVAC or hot water systems that reduce energy and power costs by 50% or more. Any accrued tax deductions from these buildings can be carried back three tax years or forward for up to 20 years. Eligible designers and builders also can qualify for the deduction under a special rule for public property.
Will we be able to claim bonus depreciation for the 2023 tax year? Take advantage of this deduction while you still can! Bonus depreciation allows businesses to deduct a typically large percentage of the cost of qualified assets purchased in the year they’re placed in service. Under the CARES Act, qualified improvement property that was placed in service from 2018 through 2022 qualified for a 100% deduction. However, bonus depreciation begins to be incrementally phased out starting this year. Taxpayers are limited to 80% of the cost of qualifying assets for 2023. The percentage is then scheduled to be reduced annually until it’s eliminated after the 2026 tax year.
Are we eligible for state tax credits or other incentives? Don’t focus only on which federal tax breaks may be available to your construction or real estate company. State governments also issue tax credits and other incentives to facilitate development, restoration and cleanup. A professional tax advisor should be able to identify your home state’s tax breaks and assist you in determining whether and how your construction business could benefit from any of them.
Are we making the most of our professional advisors? Fully engaging in year-round strategic tax planning calls for contributors beyond your leadership team and staff. We’d be happy to elaborate on the answers above as well as help you identify all the tax-saving opportunities available to your business.