As 2023 comes to an end, it is time to start planning for the next year’s tax season. When formulating a plan to ensure an optimized refund, companies may feel overwhelmed by all the different considerations and worry about leaving money on the table. In this article, we will discuss 7 key deductions, credits, and strategies for your year-end tax planning.
Section 179D Deduction
Owners of new or existing buildings can claim a tax deduction of $1.80 per square foot after they install energy efficiency improvements. These improvements must reduce the energy and power costs by at least 50%, including interior lighting, hot water systems, HVAC, and building envelope. Any accrued tax deductions from these buildings can either be carried back for two years or forward for up to 20 years.
Contractors who create the technical specifications on a designed project for a government-owned building to improve its energy efficiency can benefit from this deduction once construction is complete. This does not include contractors who only install, repair, or maintain the project. To qualify, the project must undergo a physical inspection by a third party who is licensed for 179D by the state where the building is located. This inspection must review, analyze, and certify the energy-efficient improvements. Finally, the contractor must also obtain an allocation letter from the government entity that owns the building.
State and Local Tax (SALT) Considerations
The SALT deduction allows those individual taxpayers who itemize their federal taxes to deduct some specific taxes they pay to state and local governments. The TCJA placed a $10,000 cap on these deductions, so individual payers can only deduct up to $10,000 of their property taxes added to their state income or sales taxes each year. While individual owners of companies will have their pass-through income be subject to the SALT cap, any pass-through entities are not subject to that limitation and can take an unlimited deduction for the income related to the PTE activity. However, some states have passed laws limiting this, such as the Pass-Through Entity level tax (PTET). With eligibility, restrictions, and election filing requirements varying by state, it is vital to ensure your company follows all state tax laws, particularly for companies working in multiple states.
Employee Retention Credit
Contractors who retained employees in 2020 and 2021 despite lower revenues may file amended returns to claim the Employee Retention Credit (ERC). Employers should use Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, to claim any credits they did not claim previously and qualify for. Amended returns must be filed within three years after filing the original Form 941, so time is running out. The ERC for 2020 is up to $5,000 dollars per employee, and it is up to $7,000 per employee per quarter for the first three quarters of 2021. Contact our Elevate team for help claiming the ERC.
Research & Development Credit
Many contractors have overlooked the opportunity to claim the Federal Research and Development Tax Credit. This credit not only applies to new business components but also to improved business components. The IRS requires businesses to undertake qualifying research to discover technological information, and that research’s application must have the intended use of developing a new or improved business component. Additionally, the research must experiment with developing a new or improved function, reliability, performance, or quality.
The R&D credit will cover up to 20% of a contractor’s qualifying R&D expenditures, including research, payroll, experimental supplies, and qualified educational institute research. In some cases, contractors can claim those same expenses when calculating state-level credits. It is important to consult a tax professional with expertise in this area when considering claiming credits at both state and federal levels to avoid misfiling and any penalties.
Revenue Recognition
Contractors can utilize two primary methods of accounting to create potential tax deferrals without heavily impacting financial reporting: the casting method and the accrual method. The cast method recognizes revenue upon its receipt and expenses when they are paid. The accrual method recognizes revenue when it is earned and expenses when they are incurred.
The IRS considers contractors with average annual gross receipts exceeding $25 million to be large contractors. Large contractors are required to utilize the percentage of completion (POC) method on long-term contracts. This does limit the options for deferment for those contractors. Additionally, contractors can be subject to alternative minimum tax considerations as well, and the type of company (“C” Corp vs “S” Corp) can have different considerations when determining what deferments can be made.
Debt Restructuring
While there are many reasons to consider restructuring a company’s debt, all will have significant tax consequences. The TCJA limits business debt deductions to 30% of EBITDA. Any interest expenses that exceed that limit can be carried forward into future tax years. Remember, depreciation, amortization, and depletion are no longer added back into ATI, so deductions may be limited.
Estate & Gift Tax Opportunities
For the many construction businesses that are family-owned, it is important to establish a succession plan that will protect all assets while transitioning. Wealth transfers can be a long process with numerous steps involved in their implementation. Planning now will allow the lead time needed to ensure an equitable and smooth transition. Additionally, the lifetime exclusion amount will be cut in half by 2026, so now is the time to start planning.
Contractors and construction companies should consider these tips as general guidance, and they should consult a tax professional who specializes in the construction industry to attain a more tailored approach to their company’s specific circumstances. Baldwin CPAs has the experience and expertise to optimize your company’s tax strategy. Contact BCPA today for a consultation.