Construction Tax Planning: 10 Strategies for Year-End

As a construction company owner, you’re no stranger to planning and strategizing. While you’re busy wrapping up projects and preparing for the new year, there’s another crucial task that deserves your attention: year-end tax planning.

By implementing smart construction tax planning strategies now, you can potentially save your construction business thousands of dollars in taxes and set yourself up for a financially strong year ahead.

#1: Expensing and Depreciation

Equipment, vehicles, machinery and other property can be expensed through Section 179 and bonus depreciation. This construction tax planning strategy allows you to deduct a large portion of the cost upfront instead of depreciating it over many years for federal tax purposes.

For the 2024 tax year, you can deduct 60% of qualifying purchases through bonus depreciation. This is part of a phased reduction introduced by the Tax Cuts and Jobs Act (TCJA) of 2017.

Here’s how the bonus depreciation rates are changing:

For 2024, you can deduct purchases up to $1.22 million provided you have sufficient taxable income. This tax incentive is particularly valuable for construction company owners looking to reduce their tax liability.

To illustrate, imagine your construction company purchases a new excavator for $500,000 in 2024. Here’s how the deductions might play out:

1. Bonus Depreciation: You could deduct 60% of the cost immediately, which amounts to $300,000 (60% of $500,000).
2. Section 179: Alternatively, you could potentially deduct the full $500,000 under Section 179, assuming you have enough taxable income and haven’t exceeded the annual limit.
3. Regular Depreciation: Any remaining cost not covered by bonus depreciation or Section 179 would be depreciated over the asset’s useful life.

With a strategy like this, you could potentially reduce your taxable income, resulting in significant tax savings. But remember, to take advantage of these deductions for the 2024 tax year, the new equipment would need to be placed in use before the end of the year.

Similar principles apply to other qualifying assets like work trucks, office equipment and specialized construction software. The key is to consider how these deductions fit into your overall tax strategy. While it seems like your best bet is to deduct as much as possible in this tax year, that isn’t always the right approach. Consulting with an experienced construction tax advisor can help you make the most of these opportunities while ensuring compliance with tax regulations.

#2: Taking the Qualified Business Income Deduction

The Qualified Business Income (QBI) deduction allows eligible construction company owners to deduct up to 20% of their qualified business income. This is particularly beneficial for businesses operating as pass-through entities.

For instance, if your construction company generates $500,000 in qualified business income, you could potentially deduct $100,000 (20% of $500,000), significantly reducing your taxable income.

However, the deduction may be limited to 50% of W-2 wages paid. If you’re approaching this limit, consider issuing year-end bonuses to employees.

This strategy can help you maximize the deduction while also rewarding your workforce for their contributions to your company’s success.

#3: Delaying Income

For businesses that use the cash accounting method for tax purposes, delaying income can help you push tax liabilities into future tax years. Two effective strategies to consider are:

1. Delay invoicing clients until after Jan. 1
2. Pay off your payables (subcontractor or vendor bills) before year-end

By delaying income to the next tax year, you could potentially save thousands in taxes. However, it’s crucial to ensure these moves align with your cash flow needs and don’t compromise your business operations. If taking these steps means sacrificing the available funds you need for ongoing projects or payroll, this strategy may not be appropriate for your situation.

#4: Switching Your Construction Accounting Method

Construction companies have several accounting methods to choose from. These include the completed contract method, cash basis method, accrual basis method and percentage of completion method.

Each of these methods has unique tax implications. For example, the completed contract method might defer income recognition until a project is finished, potentially reducing your current year’s tax liability. This could be particularly beneficial if you have large projects spanning multiple tax years.

A construction tax advisor can help you determine which method is most advantageous for your specific situation and project portfolio.

#5: Maximizing Retirement Contributions

Maximizing contributions to retirement plans can reduce your taxable income. For 2024, the contribution limits are:

• 401(k): $23,000 ($30,500 if age 50 or older)
• SEP IRA: Up to 25% of compensation or $69,000, whichever is less
• SIMPLE IRA: $16,000 ($19,500 if age 50 or older)

By maximizing these contributions, you’re not only securing your financial future but also potentially lowering your current tax liability.

#6: Writing Off Bad Debt

For accrual-basis businesses, writing off uncollectible accounts receivable before Dec. 31 can provide a deduction.

For example, if you’ve been carrying a $10,000 receivable from a client who has gone out of business, writing it off before year-end could reduce your taxable income by the same amount.

Only actual, documented write-offs are deductible, not allowances for potential bad debts.

#7: Leveraging Tax Credits and Deductions

Several tax credits and deductions are particularly relevant to construction companies:

• R&D Tax Credit: This credit rewards innovation in construction processes or materials. For example, if your company has developed a more efficient building technique or experimented with new sustainable materials, you might qualify for this tax credit.
• Section 179D: This tax deduction applies to energy-efficient building designs, offering a deduction ranging from $2.50 to $5.00 per square foot based on the level of energy efficiency achieved. For instance, if you’ve implemented highly efficient systems in a 50,000 square foot commercial building project, this could potentially result in a deduction of up to $250,000.
• Section 45L: This credit applies to energy-efficient residential construction, with the credit amount varying based on the level of efficiency achieved. If you’re building energy-efficient homes or multi-family units, this credit could significantly reduce your tax liability.
• Work Opportunity Tax Credit: This federal tax credit incentivizes hiring from certain target groups. For example, hiring a qualified veteran could result in a credit of up to $9,600, directly reducing your tax bill while also expanding your workforce.

While these credits can offer significant savings, they often require detailed documentation and calculations. Talk to an advisor experienced in construction industry tax incentives to ensure you’re maximizing these opportunities while staying compliant.

#8: Opting Out of the Business Interest Expense Limitation

Section 163(j) of the Internal Revenue Code limits the amount of business interest expense that can be deducted, generally to 30% of adjusted taxable income. This limitation typically applies to businesses with average annual gross receipts exceeding $29 million over the past three years. However, certain real estate professionals and contractors can elect to opt out of this limitation.

Opting out means you can deduct all of your business interest expense without the 30% limitation. This can be particularly beneficial if your company has significant interest expenses. But there’s a trade-off: You’ll have to give up bonus depreciation and instead use the alternative depreciation system (ADS) for nonresidential real property, residential real property and qualified improvement property. This typically results in slower depreciation.

This strategy can be especially advantageous for some contractors, particularly home builders, who may have high interest expenses but less need for accelerated depreciation on heavy equipment. Carefully assess whether opting out would truly benefit your construction company’s overall tax position.

#9: Timing Your Tax Planning

For effective year-end construction tax planning, aim to conduct tax projections by early November. This allows you to make informed decisions throughout November and December based on your financial position as of September 30. If you use the completed contract method, consider doing projections based on June 30 information for a clearer picture of your year-end status.

In Florida, where many of our clients are based, the deadlines for 3rd and 4th quarter estimated payments have been delayed until Feb. 3, 2025  due to hurricane extensions. This gives you more time to adjust your payments based on your taxable income and can help with cash flow management.

#10: Financial Statement Preparation

Ensuring your financial statements are accurate and up to date is crucial for effective construction tax planning. Having current books and work in progress (WIP) schedules allows you to make informed decisions before the year-end rush. Many clients find themselves scrambling in December, which can lead to missed opportunities or hasty decisions. To maximize your tax strategy:

• Keep your books updated regularly throughout the year
• Maintain accurate and current WIP schedules
• Prepare your financial information by early October to allow time for thorough tax projections
• If using the completed contract method, consider preparing projections based on June 30 information for a clearer picture of your year-end status

By staying organized and having your financial information ready, you’ll be better positioned to take advantage of tax-saving opportunities and make strategic decisions for your construction business.

Plan Ahead for Tax Savings

Remember, tax laws are complex and can change from year to year, as can your business’s financial performance and long-term strategy. To get the most out of your tax strategy, consult with a construction tax professional before making any of these year-end tax moves. They understand the opportunities in the construction industry and track changes as they occur, helping you optimize your tax position and potentially save significant amounts on your tax bill.

Don’t wait until December to start your tax planning. Talk to James Moore today to identify tax strategies that will set your construction business up for long-term financial success.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.