A year round strategy for taxes is the best way to move a contracting business forward. That’s the advice of experts who point out that deferring income, a typical tactic to reduce tax payments, can backfire by hamstringing growth. Read on for more insights from advisors, including suggestions about tax deductions to leverage.
It’s Not Too Late
Although tax advisors specializing in construction encourage a year round, “holistic” approach to tax planning, they point out that even with tax season “in full swing, there are still things concrete and construction companies can do to benefit from this tax season”:
Contractors should confirm that the tax reporting method they’re using for each contract is appropriate by determining which projects are or are not considered long-term (longer than one year). Most contractors use the percentage-of-completion method (PCM) for long-term contracts. However, many exceptions exist. For example, residential builders generally qualify to use a different tax reporting method. The definition of a residential contractor is not just a home builder. In addition, under the Tax Cuts & Jobs Act of 2017 (TCJA), tax accounting methods previously available only to smaller contractors can generally be used by contractors with average annual gross receipts of up to $26 million (as adjusted for inflation). Choosing the appropriate method for each contract to reduce tax costs is a tool that is often overlooked, and each contract could have a different method of reporting for income tax purposes.
When you are in business as a contractor, Marty McCarthy, CPA, CCIFP, and managing partner of McCarthy & Company, emphasizes the importance of “genuinely” knowing how contract provisions can help or hinder with taxes and shares these examples: “A unit price contract or GMP (Gross Maximum Price) contract has a different tax provision than a lump sum contract. Contract provisions that provide pay if paid or paid when paid carry different tax reporting methods. The retainage provision affects tax reporting as well.” McCarthy also points out that taking a holistic approach to taxes is critical, as illustrated by the habitual, and often detrimental tactic of deferring income while accelerating expenses:
Strategic tax planning takes into consideration many other factors, including how reducing income for tax purposes will affect financial statements, cash position, capitalizing on current elections, and much more. For example, when deciding on a lending and bonding program, lenders and sureties rely on the strength of a contractor’s financial statements and the company’s character, capacity, and capital. Customers also review these metrics to ensure that the contractor is financially strong and can meet their performance obligations.
Philp Shepard, the lead underwriter at Colonial Surety, concurs with McCarthy, and explains that at tax time, taking too big a distribution from the company on the heel’s of strong earnings“weakens the company’s cash position—and ultimately limits the capacity to secure bid bonds for larger projects.” As you think forward about growing your construction company, Colonial Surety is here to help with a surety line of credit and the value added business services of The Partnership Account for Contractors®. Once qualified, you will use our powers of attorney to issue your own bid bond—and you can do so right up to the last moment you need it. With Colonial, owners also have a private digital dashboard, providing a day to day snapshot of single and aggregate limits, as well as current and available bond capacity. As work in progress decreases, work on hand can be updated, increasing the aggregate. The result? Yes, you can go ahead and move that next bid ahead.
Let’s get you growing today: The Partnership Account®.
Good To Know
Tax advisors remind builders that there are a variety of tax credit programs that can be leveraged. While many programs are federal, don’t overlook state level initiatives. For example, McCarthy and Company point to green energy credits and incentives, noting: “New Jersey recently established a credit for concrete manufacturers that meet specific low-carbon standards. This is just one state and one such program, but there are many more, and most states have some initiatives to facilitate development.” Among the many federal tax programs builders should consider are these two:
The ERC (Employee Retention Credit) is a refundable tax credit against certain employment taxes. The credit reduces the employer’s share of Social Security and Medicare taxes. The credit can be in excess of the employer’s share of these taxes, which adds to the contractor’s refund. Employer-paid health insurance costs may also be eligible….
The Consolidated Appropriations Act (CAA) of 2021 made the Energy Efficient Building Deduction (Section 179D) permanent. Business owners and government contractors can take a deduction for energy-efficient improvements to commercial and government buildings. A tax deduction of $1.80 per square foot is available to new or existing building owners who install interior lighting, building envelope, heating, cooling, ventilation, or hot water systems that reduce energy and power costs by 50% or more. Any accrued tax deductions from these buildings can be carried back two tax years or forward for up to 20 years.
As you steer your business through tax season and beyond, don’t forget, you may be able to leverage the advantages of The Partnership Account® from Colonial Surety too. Learn more and pre-qualify right here. Once qualified, you can take the guess work out of understanding your limits and opportunities, using your private owner’s dashboard to access and analyze your underwriting review, financial trends, bid spreads, credit scores and more. With all this useful data at your fingertips—and Colonial as your partner, you’ll have the ability to better plot your bidding strategy and increase your profits.
Get started today: Pre-Qualify and Get Free Scores Here.
Founded in 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed.