Year-End Tax Moves: How Your Construction Company Can Benefit
Originally published on October 16, 2023
Your thoughts might turn to holiday planning as the end of the year approaches. So why not give yourself (and your construction business) the gift of a lower tax bill? You might be able to reap significant financial benefits with a few year-end tax moves.
Expensing and Depreciation
Equipment, vehicles, software and other property can be expensed through Section 179 and bonus depreciation. This popular year-end tax move allows you to deduct a large portion of the cost up front instead of depreciating it over a period of many years.
For the 2023 tax year, you can deduct 80% of the amount of these purchases through depreciation. While this is a sizeable chunk, it’s the first in a series of reductions. Bonus depreciation was introduced in the Tax Cuts and Jobs Act (TCJA) of 2017; at that time, it was a 100% deduction.
However, the TCJA specified an annual reduction of 20 percentage points per year beginning with 2023. After the 2026 tax year, it won’t be available at all without any future policy changes. Despite the reduction in bonus depreciation, you are still able to utilize section 179. This would allow you to deduct purchases up to a cap of $1,160,000 for 2023 as long as you have taxable income.
So if you’re considering any large purchases like large machinery, trucks or larger SUVs, technology, etc., get them now while the rate is still 80%. To leverage this year-end tax move, the equipment has to be not only purchased but also placed in service by Dec. 31, 2023. While that might feel rushed, waiting until next year can cost you tens of thousands of dollars in deductions.
You can also use this strategy if you are in the process of building (or have recently built) an office building or other real property. If this is the case, consider having a cost segregation study done. This maximizes the deductions you can take using a shorter life span vs. the traditional 39-year life span for the whole building.
Taking the Qualified Business Income Deduction
The TCJA also ushered in a 20% deduction for qualified business income (QBI) for certain types of businesses. A boom for smaller businesses in particular, it allows businesses operating as a partnership, S corporation, sole proprietorship, trust or estate to take a deduction equal to 20% of their domestic trade or business income.
This year-end tax move has some caveats. The maximum amount you can claim may be limited to 50% of the W-2-based wages you pay to your workforce. If you’re getting close to that limit, consider issuing end-of-year bonuses to employees to help you reach that threshold.
Trying to stay in a lower tax bracket? Consider delaying your income until the end of December. This will push income into the next tax year and help you keep that reduced tax rate. For cash basis businesses there are two ways to do this:
- Hold off on invoicing clients until after the first of the year.
- Pay off any payables (like subcontractor or vendor bills) before year end.
Just make sure these year-end tax moves make sense given your cash flow. If taking these steps means sacrificing the available funds you need, don’t use this strategy.
Switching Your Accounting Method
Completed contract, cash basis, accrual basis, percentage of completion… there are several accounting methods to choose from. Each method has pros and cons, so consider which makes the most sense for your company in the long run.
A construction CPA can perform projections to see which would best defer income or otherwise benefit your tax return. This accounting method change generally doesn’t have to be made until your tax return is actually filed.
Maximizing Retirement Contributions
Maximizing contributions to retirement plans is a great year-end tax move because it can reduce your taxable income. The limit you can contribute depends on the type of plan, so be sure to check your particular plan for its maximum.
You can also set yourself up for a better return next year by implementing a profit-sharing plan at your construction business. Your company will then have until Sept. 15 to contribute to that plan and get a bigger tax deduction. While that doesn’t help you until your return for next tax year, you can at least get the ball rolling now.
Writing Off Bad Debt
Do you have accounts receivable that you’ve been unable to collect? If yours is an accrual-basis business, write them off before Dec. 31 so you can claim them as deductions. To utilize this year-end tax move, the dollar amounts have to be actual, documented write-offs. If you’re creating a write-off allowance in your budget, the allowance amount is not deductible and provides no tax benefit.
Leveraging Tax Credits and Deductions
You could be eligible for a number of credits and deductions that make great year-end tax moves.
- R&D tax credit – If your construction company is innovating and improving processes or materials, you might qualify. This could include work on better construction methods, architectural designs, environmental impact, etc. These efforts are generally seen as research and development work. R&D credits can add up to as much 14% of the qualified expenses you spend in this area. So it pays (maybe literally!) to at least ask your CPA about them.
- Section 179D – Nope, it’s not the same as the Section 179 depreciation! Section 179D is a deduction engineers, construction firms, architects, etc. can take for the design of energy-efficient buildings. It can also be used for modifications that increase efficiency in existing buildings and systems. The maximum deduction available is on a sliding scale from $2.50 to $5.00 per square foot.
Important note: 179D is available only for construction of government entity projects, Indian tribal governments, Alaska native corporations and any tax-exempt entities such as some hospitals, churches, higher education institutions or private schools.
- Section 45L – This is a per-dwelling unit credit of $2,500 for energy efficient homes as measured using Energy Star programs. Even better, more money is available if you exceed these standards.
Some of these year-end tax moves (namely the energy efficiency ones) have undergone changes in recent years. So as with any credit or deduction, discuss them at length with your construction CPA.
Opt Out of the Business Interest Expense Limitation
Section 163j limits the deductibility of business interest expense. This limitation is generally calculated as the sum of:
- Business interest income for the taxable year;
- 30% of the adjusted taxable income for the taxable year; and,
- The floor plan financing interest of the taxpayer for the taxable year.
Section 163j generally applies to businesses with gross receipts averaging more than $27 million over the past three years. For any large real estate professionals and contractors, you could elect out of 163j. However, this year-end tax move means you’ll give up bonus depreciation as a trade-off. Any nonresidential real property, residential real property and qualified improvement property must be depreciated using the alternative depreciation system (ADS). They are not eligible for bonus depreciation deduction. So assess the options to determine whether this option would truly pay off for you.
Remember, tax laws are complex and can change from year to year. So consult with a construction tax professional before making any of these year-end tax moves. They understand the opportunities in your industry and track them as they change — helping you get the most out of your tax strategy.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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