Year-End Tax Planning for Construction Contractors

by: Smith and Howard

October 6, 2015

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The fourth quarter of 2015 has arrived. Now is a good time to consider your construction company’s tax liability and take the necessary steps to minimize it. As usual, the year has brought some changes to the tax laws. But at the same time, as of this writing, there’s also been no congressional action on various tax law “extenders” that may affect businesses. As we await clarity, here are some key points to keep in mind.

Catch up on Section 179

Section 179, which allows businesses to deduct rather than depreciate some equipment and software purchases, has changed for 2015. For the last several years, the deduction limit had been raised from $25,000 to $500,000 to stimulate investment. Also, a 50% first-year “bonus depreciation” amount had been in place on new equipment purchases that were above a $2 million spending cap.

But both the deduction limit increase and the bonus depreciation allowance expired at the end of 2014, so the eligible deductions for 2015 are reduced. The spending cap, which represents the maximum amount above which the eligible deduction is lessened, also drops back to $200,000 this year.

Some business groups have been lobbying for restoration of the higher deduction limits, and it’s possible that Congress will reinstate them as one of the aforementioned tax extenders before year end. If you want or need to buy additional qualifying equipment or software this year, doing so may still be tax-advantageous. But you’ll need to weigh purchase, implementation and maintenance costs against the tax savings.

Tackle tangible property rules

In 2014, the IRS issued final regulations clarifying the rules on what qualifies as expensable repairs to tangible property (such as buildings, machinery, equipment, and vehicles), and what are considered improvements and therefore must be depreciated. Some important provisions define safe harbors for routine maintenance expenses and qualified small business properties, as well as increasing the threshold amount before depreciation is required for materials and supplies.

Routine maintenance consists of activities your construction business can reasonably expect to perform more than once during the property’s service life (as defined by the IRS) to keep it in efficient operating condition. Routine maintenance is generally considered a deductible expense.

“De minimis” rules, however, apply to the safe harbor election for expensing repairs. These rules are based on whether a company has audited financial statements. Businesses with audited financial statements can elect (in writing) to deduct expenses costing less than a specified dollar amount provided each invoice doesn’t exceed $5,000 (or per item if substantiated on the invoice). But, if no audited financial statements exist, the election is $500 per invoice/item.

Don’t overlook energy deduction

Although the Energy-Efficient Commercial Buildings Deduction (Section 179D) has been in place for a decade, it’s often overlooked by contractors. If you build an energy-efficient building for your own use, or make improvements to increase the energy efficiency of a building you own, you may be eligible to deduct up to $1.80 per square foot.

In buildings owned by federal, state or local governments, the deduction may be allocated to a contractor responsible for the energy-efficient construction or modification. If you’ve worked on schools or other government buildings, making energy-saving enhancements to systems, such as the building envelope, HVAC, hot water, and interior lighting, make sure you look into your eligibility for the Sec. 179D deduction.

Increasing ACA responsibilities

Some provisions of the Affordable Care Act (ACA) are just taking effect in 2015. They may affect your liability for taxes and fees, as well as the paperwork you need to submit regarding your employee health benefits. These requirements differ depending on whether your company is defined as a small or large business under the ACA.

Small employers can buy affordable insurance through the Small Business Health Options Program. If you have fewer than 25 full-time employees earning an average of less than $50,000 per year, and you cover at least 50% of their health insurance premiums, you may be eligible for a tax credit. If you self-insure, however, you’re now required to report certain information for each employee you cover. You may also be required to pay a fee to help fund the Patient-Centered Outcomes Research Trust Fund.

Large employers face new reporting requirements for 2015, too. You may need to report the value of coverage you provide to each employee on their W-2 forms. You also must file an annual return in 2016 reporting what health insurance you offered employees (if any). Until this year, such reporting was optional. And, of course, if you don’t offer adequate coverage (as defined under the law), you may have to make a payment under the ACA’s employer shared responsibility provisions.

File with care

These are just a few of the top tax issues affecting contractors this year end. Be sure to maintain thorough documentation of your financial activities throughout the year to make filing as efficient and productive as possible. And, as always, consult your tax advisor about the latest updates and strategies best suited to your construction business.

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