How To Be A Proactive Tax Planner
Although the beginning of the year is typically a time to wrap up the previous year’s tax compliance matters, it is never too early to take a proactive stance on tax strategy and planning for the upcoming year. While there appear to be no material changes on the horizon for 2025, there are still numerous strategies that can be reviewed to help reduce your construction company’s tax liabilities. Keep reading for six key areas to review now and throughout the year ahead to ensure that your business maintains its strategic position from a tax perspective.
Evaluate Sunsetting Tax Provisions
Many favorable tax provisions such as the Qualified Business Income (“QBI”) deduction and decreased individual income tax rates are scheduled to expire Dec. 31, 2025. However, with the upcoming change in administration, it’s unclear if a decision will be made to extend or extend current provisions beyond Dec. 31, 2025. Uncertainty aside, owners should consider potential law changes when evaluating capital expenditures, exit transactions, or any other tax strategy that has an opportunity to defer the recognition of an expense or accelerate the recognition of income. Being proactive in managing known changes in tax law can result in significant long term benefits.
Review Long-Term Contract Accounting Methods
Unlike most other operating businesses that generally have only two tax methods of accounting available to them (i.e. accrual and cash), contractors have a larger choice when determining accounting methods for their long-term contracts. These can include the Completed Contract Method, the 10% deferral method, and multiple methods utilizing different factors for computing percent complete for income tax purposes. (Stay tuned: In the next two installments of our Construction Industry Advisor newsletter, we will highlight all accounting methods available to contractors and explain how each one can provide significant income deferral opportunities.)
Section 179D Deduction
The Section 179D deduction, also known as the Energy Efficient Commercial Buildings Deduction, is a tax incentive that promotes energy efficiency in commercial buildings. This valuable deduction allows building owners to claim a tax deduction for installing energy-efficient systems, such as interior lighting, heating, cooling, ventilation, and hot water systems, or for making energy-efficient improvements to the building envelope. The deduction is available to owners of qualified commercial buildings and designers (including design-build contractors and performance contractors) of energy-efficient systems installed in buildings owned by certain tax-exempt entities. The amount of your deduction is calculated based on energy savings achieved, with a maximum deduction of $5 per square foot if prevailing wage and apprenticeship requirements are met. If not, owners may claim a deduction of up to $1 per square foot for buildings that achieve greater than 25 percent energy savings.
45L Energy Efficient Tax
The Section 45L Energy Efficient Home Credit is another tax incentive designed to encourage the construction of energy-efficient homes. This credit is available to eligible contractors that build or substantially reconstruct qualified new energy-efficient homes. The amount of the credit can be up to $5,000 per home, depending on the energy efficiency standards met and the date the home is acquired. Homes must meet specific energy-saving requirements under the Energy Star or Zero Energy Ready Home programs to qualify for the credit. This credit was expanded as part of the Inflation Reduction Act of 2022, making it a valuable opportunity for contractors to reduce their tax liability while promoting sustainable building practices.
Accelerated Depreciation
The 2017 Tax Cuts and Jobs Act allowed for favorable depreciation provisions, including 100 percent expensing of most personal property for years 2018-2022 via bonus depreciation. Starting in tax year 2023, the bonus depreciation rate was phased down to 80 percent and will continue a 20 percent phase down each year until reaching 0 after 2026. This yields a bonus depreciation rate of 60 percent in 2024 and 40 percent in 2025. Taxpayers should also consider alternative depreciation options, such as a review of tangible property regulations and Section 179 to achieve immediate deductions of fixed asset purchases.
Employment Credits
The Work Opportunity Tax Credit (“WOTC”) and Empowerment Zone Credits (“EZ”) are wage-based credits for employees who meet certain criteria (i.e. residence, food stamp recipients, veterans, and ex-felons, to name a few). The amount is driven by the amount of wages paid to eligible employees. These credits are set to expire Dec. 31, 2025. Before claiming these credits, you must have a process in place to screen eligible employees. It’s worth your time, however, as taking advantage of these credits can yield significant credit amounts.
Next Steps For Your Construction Company
Tax planning is essential for construction companies and others looking to optimize cash flow while minimizing their long-term tax liability. Consider working with a CPA firm that specializes in helping construction companies realize tax savings in Cincinnati, Columbus, Indianapolis, Toledo, and beyond. Contact Ryan Kilpatrick today to learn more.
By Ryan Kilpatrick, CPA, CCIFP, director, tax and business advisory consulting (Cincinnati), and Emma Giroux, CPA, tax manager (Columbus)
