Death and Taxes - Do you Plan or just file tax returns for your Construction Company?
Construction Company Taxes are not one-size fits all. You need to plan and have a strategy.
Running a business of any size is tough work, especially a business in the construction and trades industry. You have to train employees, pay salaries, and constantly deliver best-in-class services to your customers. So, when it comes to taxes, we don't expect you know the nuances of the tax code. But, understanding some of the unique tax situations that are available to businesses can help you stay compliant, file a correct return, and reap as many deductions as possible.
No, before you fall asleep, this is not about to turn into a super detailed tax lecture. This is just to get the juices flowing about how you should understand, at least from a high level, the strategies available to you as a business owner.
1) You Need a Tax Strategist (not preparer) That Understands Business and Possibly Your Industry
Find someone, above all, who will work with you. You need someone to be available to answer questions throughout the year. Someone who will plan with you. When the bell tolls midnight on December 31, the planning is done and the reporting begins. There are great reporting options out there, but most of the value comes from planning appropriately and then reporting timely and accurately. Get a grip on knowing your business tax numbers. If you don’t have someone to give you this level of service, find them. Spending a few thousand dollars a year on this level of service could save you tens of thousands of dollars on tax liability payments later.
2) Pay Attention to Common Deductions
To make the most of each return, companies should pay attention to the common deductions within their industry. Asan example, the most common deductions for construction companies include:
Travel : This is usually the most significant deduction for construction and includes time spent traveling from location-to-location, traveling to meet clients, and any other travel that was directly work-related (tool runs, material delivery, etc.) The current rebate for this mileage is 54.5 cents per mile.
Asset Deductions : There are two types of asset deductions that construction workers typically qualify for: immediate and depreciated. Immediate deductions are for assets such as cars, trucks, salaries, tools with a short lifespan, supplies, materials, and marketing. Depreciated assets include long-lasting tools like heavy machinery or long-lasting tools, which you can deduct over a long period of time.
Small Deductibles : Small items like steel-toed boots, clothing, hard hats, and other construction-specific equipment can be used as deductions.
Training : These are deductions for school, certificates, or even learning materials (i.e., journals, membership fees, etc.)
3) There's a Difference Between Business Assets and "Mixed-Use" Assets
Most small businesses couple assets as both work and "play." These are considered mixed-use assets, and they give smaller deduction percentages than strictly business assets. So, if a construction company supplies cellular devices that are used both at-work and at-home, these are mixed-use assets.
4) Take Advantage of the Section 199 Manufacturers Deduction
The Section 199 deduction was proposed to encourage domestic manufacturing. However, current updates to the bill have expanded the deduction to include businesses engaged in construction, engineering, and other activities. This tax break can save construction businesses up to 9% on their taxes — which can be a significant boon for small businesses facing strict tax rates.
5) Understand How Your Materials are Taxed
In some states, construction workers are charged a general sales tax on materials, which is usually preferable since construction companies can easily make up this tax on markups. However, other states treat construction workers as material "resellers." This means that construction companies will be charged a higher tax rate since it's assumed that the material will be marked up.
6) Make Sure That You Identify Employees Correctly
Some construction companies get confused when it comes to filing employee under a w-2 or 1099. While filing all employees under a 1099 may seem tempting, it can land you in a load of trouble. For a worker to be considered a "contractor", they must be hired independently from all other workers, and they must have control over the job's completion. Since filing employees under 1099 doesn't require businesses to pay a portion of taxes and unemployment insurance, many construction companies use this to avoid paying significant employee taxes. Unfortunately, the penalty for these instances can often be thousands of dollars per employee — not to mention the added pressure from the IRS, which may manually pour over your entire return.
7) Choose (or Change) your Business Type
Depending on how you hold your business, your taxes could be greatly affected. A quick way to consider reducing taxes is to have a review of your business structure or a prior year’s tax return to outline ways to better control your tax liability.
Final Thoughts
There is never a “one size fits” all approach to book keeping, taxes, planning, or preparation. Find the answers to your questions. Take control of your tax reality. Interview multiple providers to find the one who balance your risk tolerance with the black and white rules. If you have questions about some ways that you can take advantage of more of the services and strategies listed above, feel free to contact our office for a free consult.