April 2025 may feel like a lifetime away, and tax planning can easily take a back seat to the challenges contractors face daily. However, it is never too early for construction companies to prioritize tax planning. Before closing your books for the year, prioritize these key year-end tax planning strategies to maximize deductions, reduce liabilities, and ensure compliance. Consider the broader impact on your entire business, shareholders, banking, bonding, and other stakeholders, both now and in the future. Proactive tax planning could save you thousands of dollars.
Prepare for Effortless Tax Filing in 2025
To simplify the annual filing process in 2025, ensure you get organized before year-end. Start by ensuring your financial records are accurate, timely, and well-organized. Confirm that all estimated tax payments have been made on time and for the appropriate amounts. Additionally, verify the filing obligations for any out-of-state work and review owners’ compensation to ensure it is accurate and tax efficient.
Ensure Tax Efficiency by Reviewing Your WIP
For tax purposes, projects are complete when you incur 95 percent of construction costs. Review your work-in-progress list to identify projects nearing this threshold. Work with your CPA to determine how accelerating or deferring completion could affect your taxable income. For instance, postponing project completion during years with higher tax rates and shifting income to a year with lower tax rates might be beneficial.
Assess Your Accounting Method
Effective cash flow management is essential in a high-interest rate environment. Review the impacts of various accounting methods and choose one that aligns with your income, cash flow requirements, investment needs, and project timelines. For example, some firms may prefer to recognize income throughout a project to avoid a large, lump-sum tax bill, while others might defer income and tax liability. Here are some advantageous accounting methods for contractors to consider:
10 Percent Method: This method allows contractors to defer income when projects are less than 10 percent complete. It is particularly beneficial for projects that begin late in the year or for large multi-year contracts.
Accrual Without Retainages Method: This option can benefit specialty contractors and subcontractors by deferring income recognition related to certain retainages receivable until they are contractually payable.
Completed Contract Method: This option allows taxpayers to defer recognizing income from a contract until completion, potentially deferring significant taxable income for multiple years. With both the completed contract and cash methods, consider the necessary alternative minimum tax adjustments for reported contracts.
Cash Method: This method recognizes income when cash is received and allows deductions when expenses are paid.
Home Construction Contracts: A home construction contract refers to any contract where 80 percent or more of the estimated costs are attributable to the construction of dwelling units in a building containing four or fewer dwelling units and improvements to real property related to these dwelling units. For example, when a contractor builds a single-family home or townhome with up to four dwelling units, they are not required to report income using the percentage of completion method. Income then may be reported on the completed contract method.
Residential Contracts: A residential contract is similar to the home construction contract definition, except that the building contains more than four dwelling units. It does not include a hotel, motel, or establishment used intermittently. For residential contracts, a 70/30 hybrid method is allowed. The contractor reports 70 percent of the contract using the percentage of completion method. The contractor reports the remaining 30 percent under an exempt method, such as the completed contract method discussed earlier. Some examples are general contractors and sub-contractors working on apartments, condominiums, dorms, assisted living facilities, barracks, and prisons.
Explore Tax Credits & Incentives
Explore potential tax-saving opportunities by thoroughly reviewing your projects for available credits and incentives. Here are some key opportunities:
45L Tax Credit: Receive up to $5,000 per unit for qualifying energy-efficient residential buildings.
Fuel Tax Credit: This credit applies to fuel used in qualified off-highway vehicles and equipment, with varying amounts for gasoline, diesel, and propane.
Research & Development Credits: If your business has created new products or improved processes, you may be eligible for these credits. Be aware that recent changes now require R&D costs to be capitalized and amortized rather than deducted immediately.
Work Opportunity Tax Credit: Eligible employers can benefit from a federal tax reduction of up to $9,600 for each qualified employee from targeted groups after the employee has worked a minimum of 120 hours.
Discover Tax-Saving Deductions
Discover potential tax-saving opportunities by thoroughly reviewing your projects for available deductions. Here are some key opportunities:
Accelerating Prepaid Expenses: Prepaid expenses generally remain on the balance sheet until incurred. However, a construction company can change the accounting method to deduct prepaid expenses in the current year.
Equipment Purchases: Equipment purchases generally qualify for accelerated tax write-offs but require careful planning. The equipment must be physically available for its intended use to qualify for depreciation. While acquiring additional equipment can lower taxable income, it also reduces cash flow. Ensure purchases have a valid business purpose and follow an updated capitalization policy. To accelerate tax depreciation, consider utilizing Section 179 and bonus depreciation. Section 179 allows you to deduct up to $1.16 million, with limitations if total fixed asset purchases exceed $2.89 million. Bonus depreciation reduces to 80 percent of an asset’s purchase price starting in 2023. The remaining 20 percent is eligible for traditional depreciation. It will continue to decrease each year until 2027.
Qualified Business Income Deductions: Ensure you are maximizing the qualified business income deduction, which allows for a deduction of up to 20 percent on qualified income from businesses operated directly or through pass-through entities. Consider the potential impact of giving bonuses and guaranteed payments versus distributions. Wages paid to owners, including bonuses, essentially transfer income from the business to individuals, netting the same overall taxable income. However, this also reduces the amount of business income eligible for the deduction, resulting in a potential loss of the 20 percent deduction if you distribute too much in wages.
Section 179D Tax Deductions: Claim up to $5.65 per square foot for installing energy-efficient systems in commercial buildings. This deduction is also available to contractors involved in renovations for nonprofit or government entities.
Consider the State Pass-Through Entity (PTE) Election
Under current law, most owners cannot take advantage of state income tax deductions without making the PTE election. This election allows businesses to pay and deduct state income taxes at the business level, resulting in lower taxable income for the owners. Evaluate whether it is beneficial for pass-through entities to pay state taxes at the entity level rather than at the shareholder level. For states that allow a pass-through entity tax election, the business can deduct state taxes on its federal return. In contrast, if shareholders pay taxes directly, the deduction is capped at $10,000 per individual.
Optimize Your Profit-Sharing Plan
Consider establishing a profit-sharing plan or enhancing an existing one to maximize benefits. This approach is especially advantageous for union contractors with limited participants in the company plan.
Prepare for 2025 Tax Law Changes
Several provisions of the Tax Cuts and Jobs Act (TCJA) will sunset after 2025 unless Congress intervenes. Construction firms should be aware of the following:
Depreciation Changes: Bonus depreciation will decrease to 60 percent in 2024. The remaining amount is eligible for traditional depreciation. It will continue to decrease each year until 2027. If Section 179 is not utilized, the remaining amount will be depreciated over the asset's useful life. Construction firms should prepare for reduced depreciation deductions and increased taxable income related to equipment purchases. The phaseout of bonus depreciation will continue until its complete elimination in 2027.
Expiration of SALT Cap: If the $10,000 cap on state and local taxes (SALT) expires after 2025, taxpayers will be able to claim all state and local taxes, leading to a significant reduction in their federal taxable income.
Expiration of Standard Deduction and AMT Provisions: When the standard deduction and alternative minimum tax (AMT) provisions expire, owners may lose certain tax deductions, potentially increasing future tax liabilities and reducing after-tax profits.
Interest Expense Limitations: The TCJA how much interest you can deduct from taxable income. In 2024, many construction businesses may experience limited interest expense deductions due to rising interest rates. If your deductions are limited, you may need to report higher taxable income than expected, potentially resulting in a larger tax bill.
Tax Rate Adjustments: Top individual tax rates will increase from 37 percent to 39.6 percent, and PTE owners will lose the 20 percent deduction on qualified business income, leading to higher personal tax rates. However, with careful planning, S-Corporation and partnership owners could restructure to benefit from the lower, permanent corporate tax rate of 21 percent.
Experts in Construction Advisory Services
Tax planning and tax preparation are not the same thing. Don’t wait until April to start reviewing and revising your tax strategies. Construction companies that start early — ideally before year-end — will have more opportunities to improve their tax outlook. As one of the Top 50 Construction Accounting Firms in the United States (Construction Executive 2021, 2022, 2023, and 2024), we build long-term, value-added relationships and provide solid solutions that help positively impact your construction business. With over 66 years of leadership, experience, and expertise, our talented team of CPAs and advisors fully understand the nuances of the construction industry and provide resources beyond the traditional audit, accounting, and tax services to construction businesses throughout the country, with revenues ranging from $5 million to $500 million.
Here to Help with Year-End Tax Planning
Partner with us to unlock the full potential of your construction business and embark on a journey of sustainable growth and success. Contact us today to begin building a brighter future.
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