Blueprints for Success: Year-End Tax Planning to Build a Stronger Financial Foundation

As 2025 draws to a close, construction companies face more than just wrapping up projects—they also need to close out their books. Year-end tax planning offers a critical opportunity to maximize deductions, reduce tax liability, and position your business for a strong start in the new year.

Choose the Right Accounting Method

Understanding how your accounting method affects taxable income, cash flow, and financial reporting is essential. Choosing the right accounting method for your business can create opportunities to defer taxes or accelerate deductions. Common methods include:

• Cash Method: Recognizes income when received and records expenses when paid, helping improve short-term cash flow.

• Accrual Method: Recognizes income and expenses when earned or incurred, regardless of cash flow.

• Percentage-of-Completion (PCM): Used for long-term contracts, this method recognizes income as your team performs work, providing a more accurate view of business performance.

• Completed-Contract (CCM): Recognizes income only upon project completion, potentially allowing you to defer taxes.

Reviewing your accounting method can reveal opportunities to defer taxes, optimize cash flow, and improve financial clarity. In some cases, switching methods may provide significant tax advantages, especially if you manage large, multi-year projects.

Maximize Depreciation Deductions

After setting your accounting method, use capital investments and depreciation strategies to reduce taxable income. You can expense heavy machinery, vehicles, tools, and other capital assets. Key opportunities include:

• Bonus Depreciation: The OBBBA permanently restores 100% first-year bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

• Cost Segregation: Identify and reclassify components of real property into shorter depreciation lives to accelerate deductions and improve cash flow.

Strategically timing purchases can maximize these benefits, but accelerated deductions may affect future tax planning, including net operating losses and interest limitations. Modeling different scenarios helps identify the optimal approach.

Manage Work-in-Progress (WIP) and Job Costing

After addressing depreciation, turn your attention to WIP schedules, which help determine income to recognize before year-end. Overbilling inflates taxable income, while underbilling understates profits. Combine WIP tracking with accurate job costing to reflect each project’s performance, including labor, materials, and overhead.

Managing WIP and job costs carefully helps optimize taxable income, improve cash flow, and avoid year-end surprises.

Review Retainage and Receivables

While WIP indicates income to recognize, outstanding retainage can create timing challenges. Proper accounting is critical for accurate year-end reporting and effective tax planning. Key considerations include:

• Collecting Retainage: Actively pursuing retainage can improve cash flow and, in some cases, allow recognition of taxable income in a more favorable period.

• Evaluating Receivables: Review outstanding receivables for potential bad debts. Writing off uncollectible accounts provides a current-year tax deduction.

Effectively managing retainage and receivables ensures financial statements and tax returns accurately reflect project performance while creating opportunities to optimize cash flow and reduce tax exposure.

Evaluate Payroll and Owner Compensation

Income is not the only lever for tax optimization—how you handle payroll and owner compensation can also significantly affect year-end taxes and cash flow. Ensure owner salaries are reasonable and adjust payroll, bonuses, or profit-sharing timing to manage taxable income.

Careful review of payroll and owner compensation can reduce tax exposure, ensure compliance, and support year-end cash flow.

Take Advantage of Tax Credits

Beyond managing deductions and salaries, your business may qualify for valuable tax credits that directly reduce liability and reward innovation or efficiency, including:

• R&D Tax Credit: Available for innovative building techniques, materials, or processes that improve efficiency or sustainability.

• Work Opportunity Tax Credit (WOTC): Rewards hiring individuals from targeted groups, such as veterans.

Review current and upcoming projects to determine eligibility. Proper planning and documentation can unlock substantial tax savings while supporting growth and innovation.

Optimize State and Local Taxes

Federal tax planning is crucial, but project locations also impact state and local obligations. Reviewing compliance and incentives at these levels can prevent unexpected tax bills:

• Nexus and Apportionment: Ensure income is reported correctly in each state.

• Local Taxes: Confirm compliance with sales, use, excise, and other obligations.

• Project-Specific Impacts: Consider credits or incentives that lower overall liability.

Proactive planning helps maintain compliance, maximize deductions, and avoid unexpected state or local tax liabilities.

Prepare for 2026 with Strategic Year-End Tax Planning

By combining strategic accounting, depreciation planning, and careful management of WIP, retainage, and payroll, you can enter 2026 with optimized cash flow and minimized tax liability. Use this time to:

• Forecast cash flow and capital needs for upcoming projects, equipment purchases, and seasonal fluctuations.

• Reassess your entity structure to ensure it offers the best mix of tax efficiency and liability protection.

• Meet with your CPA to review changes in tax laws and identify strategies to maximize deductions and credits.

Applying these strategies now sets your business up for 2026 with a stronger financial foundation, predictable cash flow, and a clear path to sustainable growth.

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