The construction industry plays a vital role in building infrastructure and contributing to economic growth. Yet, construction contractors and companies need to keep a close eye on their financials, and that includes taking advantage of every legitimate opportunity to reduce their tax liability.
In this blog, our team, which offers construction financial management services, lists down the key tax deductions available for the construction sector to help you keep more of your hard-earned money.
1. Business Expenses
One of the fundamental tax deductions available to construction companies is the deduction for ordinary and necessary business expenses. This category covers a wide range of costs, including:
- Employee wages and benefits
- Rent or lease expenses for equipment and facilities
- Office Supplies
- Vehicle expenses (fuel, maintenance, and insurance)
- Professional fees (legal, accounting, and consulting)
- Advertising and marketing expenses
- Utilities
- Interest on business loans
- Depreciation of assets
By carefully tracking and documenting these expenses, you can significantly reduce your taxable income.
2. Home Office Deduction
If you run your construction business from a home office, you might be eligible for the home office deduction. To qualify, your home office must be used exclusively for your business, and it should be your principal place of business. You can deduct a portion of your mortgage or rent, utilities, and home maintenance costs proportional to the size of your home office compared to your total living space. This deduction provides construction contractors who work from home with a valuable opportunity to lower their tax burden.
3. Vehicle and Mileage Deductions
Construction businesses often require significant travel, whether it’s to job sites, suppliers, or client meetings. You can claim deductions for both the business use of your vehicle and mileage. There are two primary methods for calculating vehicle deductions: actual expenses or the standard mileage rate. While the standard mileage rate is simpler, it might not yield the largest deduction. Thus, keep detailed records of your mileage, and you can choose the method that best suits your situation.
4. Cost of Goods Sold (COGS)
For construction companies that deal with inventory, such as materials and supplies, the cost of goods sold (COGS) can be a substantial deduction. COGS includes all the direct costs associated with the products you sell or use in construction, and it can significantly reduce your tax liability.
Properly tracking your inventory and determining your COGS accurately is essential for making the most of this deduction.
5. Section 179 Deduction
The Section 179 deduction is a valuable incentive for businesses to invest in capital assets. Construction companies can take advantage of this deduction to write off the full cost of qualifying assets in the year they are bought.
Machinery, vehicles, and equipment are often significant investments for construction businesses, and the Section 179 deduction can result in significant tax savings.
6. Bonus Depreciation
In addition to the Section 179 deduction, construction companies can benefit from bonus depreciation, which allows you to deduct a large portion of the cost of qualified assets in the year they are placed in service. This deduction is particularly useful for construction firms with large-scale projects that require heavy equipment and machinery.
7. Research and Development (R&D) Tax Credit
Many people associate the R&D tax credit with high-tech industries, but it’s also available for construction companies engaged in innovative projects. If your business invests in research and development to improve construction processes, materials, or technology, you may be eligible for this valuable credit.
8. Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit is designed to encourage businesses to hire individuals from specific target groups who face barriers to employment.
Construction companies that hire employees from these target groups may qualify for a tax credit, which can significantly reduce labor costs. Eligible target groups include veterans, individuals receiving government assistance, ex-felons, and more. Be sure to check the specific criteria to determine if your new hires qualify.
9. Energy-Efficient Improvements
As sustainability becomes increasingly important, many construction companies are involved in energy-efficient building projects. The Energy-Efficient Commercial Buildings Deduction allows construction companies to deduct part of the cost of making energy-efficient improvements to commercial buildings. The deduction is beneficial to the environment while offering tax incentives to construction companies contributing to energy conservation.
10. State and Local Tax Deductions
Another deduction to add to this list is the state and local tax deductions. Each state has its own tax rules and incentives for businesses. Investigate the deductions and credits available in your specific location, as they can substantially reduce your overall tax liability.
11. Qualified Business Income Deduction (QBI)
The QBI deduction was introduced as part of the Tax Cuts and Jobs Act. It allows certain business owners to deduct a maximum of 20 percent of their qualified business income. Construction contractors structured as pass-through entities like sole proprietorships, partnerships, S corporations, and LLCs can benefit from this deduction.
12. Employee Benefits
Offering benefits to your employees, such as retirement plans, health insurance, and education assistance, can be a win-win situation. These benefits not only attract and retain talent, but they can also be tax-deductible for your business. It’s essential to understand the rules and requirements for each type of benefit plan and consult with a benefits specialist to maximize the tax benefits.
Understanding and optimizing tax deductions is crucial for construction contractors and companies to minimize their tax burden and keep their financials healthy. However, the tax landscape can be complex, and the rules may change over time, making it essential to consult with a tax professional who specializes in the construction industry to navigate these opportunities effectively.
At 24 Hour Bookkeeper, we have a dedicated team of experts who specialize in providing financial management and bookkeeping services to construction companies. If you’re searching for a dependable and experienced construction financial management service to guide you through the complexities of tax deductions and financial management, don’t hesitate to contact us today.
