Year-end tax planning strategies for construction companies
It’s never too early for construction companies to focus on tax planning — especially if you focus on these nine tax planning actions before 2024 year-end to maximize deductions, reduce your tax liability and help ensure compliance.
- Get organized. Take simple steps before year-end to make your annual filing easier. For example:
- Ensure financial records are accurate, timely and organized.
- Confirm estimated tax payments were made on time and for the appropriate amount.
- Confirm the filing obligations for work performed out of state.
- Review owners’ compensation to ensure it’s appropriate and tax-efficient.
- Review work in progress. Taxwise, projects are considered complete once 95% of construction costs are incurred. Review your work-in-progress list to identify projects that are close to meeting that threshold. Then, work with your CPA to determine how accelerating or deferring completion could affect your taxable income. For example, in years with higher tax rates, it may be advantageous to defer completion and push the income into a year with lower tax rates.
- Look for deductions and credits. Your work-in-progress list may contain hidden tax savings. If you are a new building owner or designated designer of certain building types, you could claim up to $5.65 per square foot in 179D tax deductions or a 45L credit of up to $5,000 per unit.
Qualifying improvements typically include HVAC systems, building envelopes and lighting systems. Start collecting certifications and reports now to make it easier to claim these deductions and credits.
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Assess your accounting method. Cash flow management is critical in high-interest rate environments. Review the cash flow and tax timing impacts of different accounting methods, then select one that matches your income and investment needs. For example, some firms want to recognize income across a project to avoid large, lump sum tax bills, while others prefer to defer income and tax liability.
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Calculate interest expense deductions and loss limitations. The Tax Cuts and Jobs Act (TCJA) limits how much interest can be deducted from taxable income. More firms could have a limited interest expense deduction in 2024 since interest rates and expenses have been higher. If limited, you may have to report higher taxable income than expected, which could mean a higher tax bill.
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Consider the state pass-through entity (PTE) election. Under current law, most PTE owners don’t benefit from state income tax deductions without the PTE election. The PTE election allows businesses to pay and deduct state income taxes at the business level, so owners recognize less taxable income
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Calculate the impact of phaseouts. Tax changes, like the phasing out of TCJA provisions, have been coming for a long time. Calculate the impact of known tax changes before year-end to avoid surprises.
Because of the phaseout of bonus depreciation, assets placed in service in 2024 are limited to 60% bonus depreciation. Smaller depreciation deductions could result in higher taxable income for equipment and capital purchases.
- Prepare for 2025 tax law changes. Several TCJA provisions will sunset after 2025, unless Congress acts. Start to evaluate and plan for their consequences now. Construction firms should be watching for:
- The SALT cap expiration: If the $10,000 SALT cap expires after 2025, taxpayers could claim all their state and local taxes — and significantly reduce their federal taxable income liability.
- Tax rate changes: Top individual tax rates will increase from 37% to 39.6%, and PTE owners will lose a 20% deduction on qualified business income. PTE owners could face higher personal tax rates on their business income.
- Standard deduction and alternative minimum tax (AMT) expirations: When the standard deduction and AMT provisions expire, owners may not be able to claim certain tax deductions, which could affect their tax liabilities and after-tax profits.
- Consult with your CPA. Your tax advisor should advise you on available deductions and tax planning strategies, including contingency plans for tax law changes. Review projections and construction in-progress schedules with your CPA to maximize your planning opportunities.
Tax planning and tax preparation are not the same thing. Don’t wait until April to start reviewing and revising your tax strategies. Construction companies that start early — ideally before year-end — will have more opportunities to improve their tax outlook.
How Wipfli can help
Wipfli can help you minimize your tax burden with targeted tax strategies for homebuilders, general, heavy/highway and other specialty contractors. Our proactive approach to tax planning and compliance helps owners increase cash flow and gain more control over their futures. Contact us for straightforward tax planning advice or visit our website.
