Certain key dates across the country signify coming together with our friends, family and community in celebration or remembrance moments. Most dates elicit some natural response of excitement and nostalgia. However, in some cases, it’s the dread that procrastination has finally come home to roost. One such date just passed, October 15. The halfway point of this month does not mean we are almost at Halloween; it means the extended personal income tax filing deadline has passed.
While some individuals within the construction industry may be shifting their focus to their next task, it’s crucial for every contractor to continue tax planning for the remainder of 2024 and keep 2025 at the forefront of their minds.
- Keep an eye on the election – needless to say, the results of the upcoming Presidential election could significantly impact our future tax code. While both candidates have put their tax plans forth, the reality is that what they say on the campaign trail versus what is enacted will differ. But we do know, as it stands right now, the current tax code is expected to sunset at the end of 2025. With that, we could see personal Federal income rates increasing and the Federal estate and gift tax exemption decreasing, to name a couple. Contractors should talk to their advisors to see if it makes sense to accelerate income into 2024 and 2025 to take advantage of lower income tax rates, which is permanent tax savings. And to the extent that any estate planning and gifting is not completed, owners of construction companies should use this runway of time to put the vision for their estate into place.
- What happened to the Tax Relief for American Families and Workers Act – back in January 2024, the House of Representatives passed this bipartisan legislation 357 to 70, pushing it to the Senate for approval where it fell into limbo. Almost a year later, there are certain key provisions most business owners would like to see revitalized. Specifically for the construction industry, the retroactive expensing of currently capitalized Section 174 costs (related to any claimed research & development credits) and the increased limits for Section 179 expenses, along with the extended 100% bonus depreciation, are of particular interest. These provisions have always proven to be key income tax deferral strategies to maximize working capital. There is chatter that these provisions and a few others could find their way back into a vote as the year closes but not before Election Day.
- Review your income tax reporting method – the tax code that governs construction is anything but straightforward. The type of contracts a construction company performs under can create opportunities to employ an accepted income tax reporting method as the basis of a deferral strategy. For example, while a construction company’s overall method may be accrual, to the extent any projects are completed within a single tax year, that project could qualify for cash basis. Further, a residential contractor (not a homebuilder) could employ a 70-30 accrual-cash basis split on reporting a qualifying project for tax. As mentioned above, we know the current income tax rates will sunset by the end of 2025; proactive tax planning comes into play by working with the contractor to model how accelerating income recognition will create a permanent tax advantage.
- Speaking of cash basis – to qualify to be a cash basis taxpayer, contractors must have three-year average gross receipts that do not exceed $30,000,000. In the past, a cash basis method made more sense for smaller to midsize contractors; they could actively control when cash came in and plan to pay vendors accordingly. However, in an age where electronic payments are the norm, the best-of-laid tax plan can be rendered obsolete if the contractor’s customer decides to pay an open requisition on December 30. It may make sense to voluntarily change to an accrual/percentage of completion reporting method; this will lead to more deferral (or acceleration) options.
- Stay the course (to some extent) – change is coming, but that does not mean the construction contractor should completely revamp their income tax planning strategy. Certain elections, credits and deductions should still be utilized to maximize tax positioning. The 10% method is a great and easy example. This is an election that contractors can make that will allow them to defer the gross profit on any project less than 10% complete. Contractors that are also active in real estate should continue to explore accelerated depreciation techniques either by ensuring leasehold improvements are correctly categorized, maximizing useful lives, or through conducting cost segregation studies, which break down the real property components by category, usually leading to catchup depreciation deductions.
While most tax deadlines have passed for 2024, with the turn of the calendar, we will see a new year, a new set of tax deadlines, a new Presidential administration, and, more likely than not, new tax reform. Typically, in an entrepreneurial group, contractors should work with their advisors to find ways to retain corporate capital, transfer wealth under the current code, and put some certainty into the looming uncertainty.
Grassi’s construction industry experts are here to help you optimize your tax strategy, plan for upcoming changes, and ensure your business is well-positioned for the future. Contact us today to schedule a consultation and discover how we can help you maximize your tax savings and protect your bottom line.
