Article written by By Jacquelyn Himes and appears on ConstructionExec.com.
There are many tax planning strategies a construction contractor can implement to reduce the company’s tax liability. Now is a good time to review the company’s financial goals, operations and results over the past year. Discuss what was done and how to qualify for tax deductions or credits with a construction accounting specialist.
Accelerating certain expenses and postponing others may help to decrease, or even eliminate, a contractor’s tax liability. It is important to consider the timing of all expenditures at this time of year, including bonus payments, as well as the reporting of income. It might be beneficial to postpone certain expenses and delay receiving income until the new year.
The Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the tax law. Contractors need to be aware of these changes and plan accordingly. Here are several tax planning opportunities that contractors may qualify for under TCJA.
Contractors should determine if it makes sense to accelerate the deprecation of assets. Section 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service. The maximum amount of allowable Section 179 expense for 2019 is $1,000,000 on qualified property that is placed in service during the year. There is a $2,500,000 phase-out threshold. If a contractor places qualified property in service that exceeds the $2,500,000 threshold, the amount of the allowable Section 179 expense is phased out dollar for dollar.
Both new and used equipment may qualify for 100% bonus depreciation. Under TCJA, contractors cannot carryback an operating loss, but they can carry one forward indefinitely.
Partnership Audit and Adjustment Rules
New audit and adjustment rules are now in effect for tax years beginning in 2018. Careful planning could mitigate any unfavorable consequences on both the entity and the partners themselves. Take into consideration how these rules will impact any investments in partnerships that the company has made.
Percentage of Completion Method of Accounting
Small construction contracts may qualify for an exception from using the percentage of completion method of accounting for long-term contracts. To qualify, the contract must be completed within two years of the start of the contact. The contractor’s gross receipts for the prior three taxable years also cannot exceed $25 million. If both conditions are met for a contract, the builder can use the completed contract method of accounting instead. The advantage is that the contractor can defer the tax due until the job is completed.
Read the full article, including information about net operating losses, qualified opportunity zones, qualified business income deductions, DOmestic Production Activity Deduction (DPAD), entertainment expenses, and business meal expenses.