Year End Tax Planning for Construction Companies

Depending on your location, the end of the year can mean construction season is winding down. At the very least, construction company owners may be planning for a new year of projects, including staffing needs, technology upgrades, and new equipment investments. In work that can feel never-ending, it’s easy for important year-end planning to be deferred until later to address the daily issues that often arise. In the closing weeks of the year there are several tax planning opportunities including deductions and credits, the QBI deduction, and tax efficient investment strategies to consider. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Deductions and Credits

Contractors are eligible for several different deductions and credits, including:

• Section 179 Deduction: With the Section 179 Deduction, businesses can deduct the cost of qualifying equipment and software in the year it was purchased. For tax year 2024, the maximum deduction under Section 179 is $1,220,000.
• Bonus Depreciation: This benefit could be alternatively applied to qualifying properties, accelerating the depreciation and providing significant upfront tax savings. With bonus depreciation, businesses can deduct 60% of the immediate cost. Currently, the rate is set to reduce annually due to changes made by the Tax Cuts and Jobs Act. The bonus depreciation rate is set to change to 40% in 2025, 20% in 2026, and 0% in and after 2027. What businesses pick between bonus depreciation and Section 179 deductions will depend on the amount of taxable income and whether it has already met the annual deduction limit.
• Research and Development (R&D) Tax Credit: Construction companies that engage in activities dedicated to developing new or improved products or processes may also be eligible for R&D tax credits.
• Energy Efficiency Commercial Buildings Deduction – Businesses that construct or renovate energy-efficient commercial buildings may be able to take advantage of the Energy Efficient Commercial Buildings Deduction under Section 179D. Depending on how energy efficiency is achieved, companies could expect deductions anywhere from $2.50 to $5.00 per foot. A similar incentive is Section 45L, which is applicable to energy-efficient residential construction projects.
• Work Opportunity Tax Credit (WOTC): Employers who hire and retain qualified individuals from targeted groups can get credit through the WOTC. This can include veterans, people who were formerly incarcerated or convicted of a felony, individuals with families who are recipients of certain benefits, and people who have been unemployed long-term.

Section 163(j) Opt-Out

The amount of business interest expense that can be deducted each year is limited by Section 163(j) of the Internal Revenue Code. This limit is generally 30% of a company’s adjusted taxable income. Construction companies and other businesses can choose to opt out of Section 163(j), allowing the deduction of all business interest expenses. However, this opt-out also comes with slower depreciation methods. Whether the opt-out is beneficial for a business will depend on how depreciation needs and interest expenses shake out.

Complete Tax Projections Early

If possible, estimate year-end tax liabilities early, possibly early November, to make strategic decisions about business operations for the remainder of the year. This can help construction companies decide whether to explore tax-saving strategies like deferring income or accelerating deductions before the end of the year. For businesses that use the completed contract method, projections based on June 30th financial data may make for a more accurate year-end tax liability estimate.

Tax-Efficient Business Structures

Different business structures can be more tax-efficient than others based on business goals and the number of owners involved in a construction company. For example, a partnership can be helpful for businesses with multiple owners by offering pass-through taxation, as well as profit-sharing flexibility. LLCs have pass-through taxation and liability protection, while S corporations reduce self-employment taxes and make distributing profits more flexible.

Qualified Business Income Deduction

Businesses that operate as pass-through entities may also benefit from the Qualified Business Income (QBI) deduction, which enables construction company owners to deduct up to 20% of qualified business income. However, this can be limited depending on the amount of W-2 wages paid to employees (50%).

Tax-Advantaged Retirement Plans

Employees and employers can benefit from strategic contributions to different retirement plans. For construction company owners, it’s important to remember that taxable income can be reduced by maxing out retirement plan contributions.

401(k) plans allow employees to contribute pre-tax dollars to retirement savings. The max contribution level is currently $23,000 for 2024, or $30,500 for contributors who are age 50 or older.

SEP IRAs are simple to set up and allow employers to make contributions on behalf of employees. The maximum contribution for a SEP IRA is the lesser amount between 25% of compensation or $69,000.

While only employers can make contributions to SEP IRAs, both employers and employees can contribute to SIMPLE IRAs. The maximum contribution limit is $16,000, or $19,500 for those who are age 50 or older.

Delaying Income and Moving Tax Liabilities

If businesses use the cash accounting method, they can delay income at the end of the year to move tax liabilities into future years. This could include paying off bills before the end of the year and delaying invoices to clients until after the first day of the new year. However, these changes should not take priority over current cash flow needs or operational imperatives.

Tax-Efficient Investment Strategies

Construction companies that invest in real estate may be able to obtain additional tax benefits. For example, Section 1031 exchanges allow investors to defer capital gains taxes on the sale of real estate by investing the proceeds into another property. Investing in opportunity zones can reward investors with significant tax benefits.

Contact Us

To maximize the potential of these tax strategies, construction business owners should consider speaking with a qualified tax advisor. Our team of tax experts can help you identify and implement the best strategies for your construction company. If you have questions about the information outlined above, or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.