Four Tax Planning Strategies for Construction Contractors
14 December, 2021
No matter how money savvy your business is, no one is exempt from paying taxes. Construction contractors can experience extremely high taxes, especially if they operate fleets, employ others and take on large jobs. On top of all the costs they face in daily operations, construction contractors can be pummeled if they face a major tax liability at the end of the year.
It's always a good idea to start prepping, and finding resources for tax season as early as possible. With more time on your side, you can routinely check in with your finances and get an idea of where you need to make changes for maximum profit. These strategies are not meant to help anyone evade taxes. Instead, they will help contractors take advantage of all the tools at their disposal to limit unnecessary costs and keep as much revenue in the company as possible.
Improve Your Bottom Line with Better Fleet Management
Better fleet management reduces costs across the board, including tax liability. Construction asset tracking and management software allows you to improve your bottom line by delivering more efficient results. Real-time data helps you optimize fleet performance for greater savings and lower expenses year-round. Better managed fleets can also help you save on taxes through reduced sales and property tax liability. Ongoing maintenance schedules, including tune-ups, should be prioritized to avoid paying more for repair sales tax.
Deter Your End of Year Profits for Incomplete Jobs
Projects that are less than 10% complete may be able to be deferred until next year. This means you avoid paying any liability for this tax season. Completion capitalized cost methods allow taxpayers to defer payments on projects that meet certain criteria. If you work on any large-scale projects that house multiple dwellings, you should be able to take advantage of this method to avoid paying for projects that are just getting underway at the end of the year.
Take Advantage of Pass Throughs for Income
Many types of business structures, such as LLCs in the U.S., allow businesses to have income pass through without incurring additional taxes. Being able to deduct allocated losses through this method can result in greater savings for the coming year. It's an efficient strategy for carrying losses into a new year and starting the next quarter off with significant debt. Because income is affected greatly by taxes and project timelines, construction contractors should prioritize paying as much as they can now rather than delaying any liabilities to a time, they may have less funds to work with.
Utilize Asset Depreciation for Greater Savings
Depreciation may sound like a bad word, but it actually helps lower your liability. As assets depreciate in value, they no longer tax as much as they once did. You are able to write off the cost of an asset for what it's currently worth, not what you paid for it, which can help lower your overall expense. You can also continually deduct depreciation each year depending on the initial price of the asset and how it has lowered in value over time. Generally, you can write off computers, vehicles and machinery for five years after the initial purchase. Properties, including rentals and residences, can be written off as depreciated assets for up to seven. Commercial buildings have the longest depreciation period, so you should be fully utilizing this timeframe as long as you are operational.
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