As the pandemic came to a close, companies and businesses have tried getting their financials checked, especially their taxed income.
And the construction industry is no exception.
As a construction business owner, after almost two years of economic turbulence, it’s best to hold on to those extra amounts of cash while you can! And if you have doubts about accurately calculating employee payrolls, why not embrace construction payroll automation? This software can ensure all calculations are done correctly and promptly, so your year-end expenditures are within budget.
So how can you maximize your tax savings as a construction business?
In this article, we will go over nine tax-saving strategies for construction companies. So keep reading and see how you can save on your taxes in 2023!
Tax liability can be a significant source of financial stress for your business, but you can use several tax break strategies to reduce your tax burden.
Since economic security is an essential factor for the success of your business, here are five tax planning tips that can help you save money and make your construction business more profitable.
Deductions reduce the amount of taxable income, so it’s important to use them. Examples include vehicle expenses, job supplies and tools, travel expenses, office expenses, advertising costs, and many others.
Recordkeeping is essential in construction businesses because most of the deductions require proof of purchase or receipt with the amount details.
This should include invoices as well as any supporting documents related to a deduction, such as hotel bills and plane tickets or mileage logs. Make sure you keep receipts safe and sound!
Timing your purchases can help you leverage deductions.
For example, if you need to buy tools and materials for a job in the current tax year, it may be beneficial to delay the purchase until the start of the next year. This will mean you will have more deductions in that tax year than in the current one.
Depreciation is an important aspect of construction businesses as it allows you to deduct items you’ve purchased, such as office equipment or vehicles, over time rather than all at once. Make sure to assess which items are depreciable and utilize those deductions when applicable.
The two most common methods of accounting construction businesses use are cash and accrual methods. It’s important to understand their differences and choose the one that best suits your needs.
Now that you know what tax planning tips will help you in your business, let’s move on to strategies that can give you a better idea of how to save more money this tax season:
The WOTC is a federal tax credit that helps businesses hire and retain employees from certain target populations. This includes veterans, ex-offenders, and individuals receiving public assistance. If a business hires an individual from any of these target populations, it can receive up to $2,400 in tax credits.
This deduction is for businesses that install energy-efficient lighting, HVAC, and building envelope systems in their commercial properties. The deduction can be up to $1.80 per square foot of the building and can be used to reduce income taxes.
The Small Business Health Care Tax Credit is a tax credit worth up to 50% of the amount employers pay for health insurance premiums. Eligibility for the credit is based on the size of the company and the average wages paid to employees.
The R&D tax credit is available to businesses engaged in research and development activities. This includes companies creating new products or services, improving existing ones, or developing new processes or technologies. Companies can receive a credit of up to 20% of their research and development costs.
A construction business can take advantage of the R&D Tax Credit by filing for credit for research and development activities related to building and construction.
Eligible activities include developing new products, improving existing ones, testing materials or techniques for improved efficiency, and designing cost-saving processes.
Tip: if you have some engineering activities that can be qualified for R&D tax credit, you may consider filing amended returns to claim the previous year’s credits.
Employee benefits such as health insurance premiums are deductible from your taxable income up to certain limits set by the IRS. Therefore, ensuring that your construction company is claiming all the deductions available when filing your taxes is important.
Retirement plans such as 401(k) and SIMPLE IRA plans are a great way to save on taxes. Not only do these plans allow you to reduce your taxable income, but they also provide a valuable benefit to your employees.
Cost segregation is an important tax-saving strategy for construction businesses. By breaking down large assets into smaller components that have shorter useful lives, you can increase the amount of depreciation deductions each year. This will help to reduce the amount of taxes you have to pay on the asset over time.
Bonus depreciation is a great way for businesses to get an immediate deduction on their tax bill by writing off up to 100% of certain asset purchases in the same year. This can be especially beneficial for businesses that are looking to invest in new equipment or technology.
Another way to save on taxes is by making use of installment payments when purchasing assets. With this method, you can spread out the cost of an asset over several years while still taking advantage of a full tax deduction upfront. This can help reduce your taxable income and ultimately save on taxes.
Tax-advantaged accounts such as Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Retirement Savings Accounts (RSAs) come with additional tax savings. These accounts are a great way to save for retirement or medical expenses while enjoying tax benefits at the same time.
Your net operating losses are not forever: Net operating losses can be used to carryback the previous three tax years and forward for up to 20 years. As a construction business, you can make use of this strategy to reduce your taxable income.
Take advantage of the Section 179 deduction: This is one of the most popular deductions for businesses, and it allows businesses to deduct the full purchase price of eligible items. This applies to construction companies, who can use this deduction for capital purchases like equipment and machinery.
Using these ten tax-saving strategies for construction companies, you can reduce your taxable income and ultimately save on taxes.
It’s essential to consult with a professional accountant or financial adviser before making any decisions, as they can help ensure that you are taking advantage of all possible deductions and credits.
Remember, saving on taxes is about reducing your bill today and preparing yourself financially for tomorrow. So make sure you take full advantage of the options available!
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