If you’re a construction company owner, you probably already know how complex the tax code can be, but did you know the ways it can benefit you? When planning for tax filing for the current year and beyond, companies should consider a variety of options available to them. This article highlights a few potential ways owners can look to the tax code for savings and opportunities.
Reporting Methods
Numerous tax reporting methods are available to construction companies to help increase their tax savings by way of deferral and sometimes even multiple methods on the same tax return. The different methods available to contractors include:
- Cash
- Accrual
- Accrual Excluding Retainage
- Completed Contract Method
- Percentage of Completion
- Exempt Percentage of Completion
- 10% Deferral Method
- Percentage of Completion Capitalized Cost Method – Residential Construction (70%/30%)
- Percentage of Completion Excluding Retainage Payable
- Percentage of Completion Excluding Subcontracts Payable
The list of possible methods is quite long, and considerations include type of contract, length of contract, average gross receipts, nature of a company’s billing and payable cycles, entity structure, and projections for the company’s growth. Talking with an experienced tax advisor can help you make a good decision for your situation. Note that companies with more than $30 million (adjusted annually for inflation) in average gross receipts over a three-year period are required to report long-term contracts on the percentage of completion method (Internal Revenue Code Section 460). Furthermore, there is an exception for residential home builders in that they are not required to report on percentage of completion and may use another permissible method even if over the gross receipts threshold.
Opportunity Zones
Construction companies should be aware of opportunity zones, which are economically distressed communities as defined by individual census tracts.1 Created by the Tax Cuts and Jobs Act of 2017 (TCJA), potential tax incentives are available for commercial and industrial real estate, housing, infrastructure, and existing or startup businesses.2 Businesses and individuals investing in these zones could take advantage of one or more potential tax benefits, including:3
- Temporary deferral of taxes on previously earned capital gains
- Basis step-up of previously earned capital gains invested
- Permanent exclusion of taxable income on new gains
While the tax incentives may not be directly available to the construction company, you may want to keep an eye on opportunities for projects in these areas.
Bonus Depreciation & Section 179
Construction companies can benefit from bonus depreciation, which allows businesses to write off a significant percentage of the cost of an asset in the first year of a purchase. However, bonus depreciation is phasing out under current law. The TCJA provided 100% bonus depreciation from 2018 through 2022, with the percentage of depreciation declining 20% each year until it is 0% in 2027.3 Construction companies can still take advantage of full depreciation through §179 if they meet certain requirements. Businesses can even combine §179 and bonus depreciation for tax advantages. After deductions are made for §179, companies can apply the bonus depreciation (40% in 2025) to any remaining amount.4
Available Credits & Incentives
Through §179D, businesses can receive a tax deduction for energy-efficient improvements made to commercial buildings and residential buildings four stories and over. These building owners may even claim §179D deductions for past projects. In addition, government and nonprofit organizations are able to allocate the deduction to the person “primarily responsible” for the design of their building, meaning even if you don’t own the building but performed the work, you may be able to take advantage of this tax incentive. Under §179D, tax returns do not have to be amended, with taxpayers filing Form 3115, Application for Change in Accounting Method, for previous years.
When hiring employees, companies may consider the Work Opportunity Tax Credit (WOTC), a federal tax credit available for hiring and employing individuals from certain groups who faced “significant barriers to employment.” According to the IRS, the WOTC is equal to 40% of up to $6,000 of wages paid to—or incurred on behalf of—an individual who is in their first year of employment, is certified as being a member of a targeted group, and performs at least 400 hours of services for that employer. For more details, see Instructions for Form 3800.
Companies also should consider whether they could receive a research and development (R&D) tax credit, which may be available for creating new or improved products or processes. Many businesses may neglect to claim this credit if they do not realize they qualify for it. If your company is combining innovation, risk, and technical skills, you may want to look into this credit further. More information is available in the IRS Form 6765, Credit for Increasing Research Activities.
State PTET Elections
In addition, companies should take note that many states enacted laws that provided workarounds to the TCJA’s $10,000 cap on the itemized deduction for state and local taxes (SALT), allowing pass-through businesses to pay and deduct state taxes without a predetermined limit. The state workarounds are known as pass-through entity taxes (PTET). The SALT cap is among TCJA provisions that must be extended this year or allowed to sunset. Taxpayers who have been taking advantage of the workaround have a number of things to consider. For more details, see our FORsights™ article, “The Uncertain Future of SALT Deductions & State PTET Elections.”
How Forvis Mazars Can Help
Forvis Mazars can assist construction companies with a wide range of services in addition to identifying potential tax savings. We work with a wide range of contractors, including heavy highway, general and specialty contractors, and specific construction mining. Our professionals can help contractors improve their bottom line, increase cash flow, and maintain regulatory compliance.
If you have any questions or need assistance, please reach out to one of our professionals at Forvis Mazars.