Whether your construction firm is experiencing a boom in demand or having a year with some financial challenges, year-end tax planning can help create additional cash flow for your business. Lawmakers and the IRS introduced several new programs and clarifications on existing programs in 2020 and 2021 related to COVID-19 relief that expanded tax credit and deduction eligibility for many businesses that may help you realize additional tax savings and leverage liability-limiting opportunities.
Below are some of the tax strategies your construction firm should consider leveraging for 2021 year-end tax planning.
Loss carryforwards and carrybacks
Eligible construction firms can use excess past losses (those they have not deducted previously) in a future year when they make money and owe more taxes to help offset the increased tax liability for the year. While losses can be carried forward indefinitely, the Coronavirus Aid, Relief, and Economic Security (CARES) Act opened carrybacks for the 2018, 2019, and 2020 tax years. Businesses can file amended returns under the CARES Act and receive tax rebates for up to five years prior to the unclaimed loss in 2018, 2019, and 2020.
179D Energy Efficiency Deduction
Eligible builders can claim up to $1.80 per foot for installing qualifying energy-efficient systems in buildings. This deduction became a permanent part of the Internal Revenue Code in December 2020.
The Tax Cuts and Jobs Act (TCJA) changed bonus depreciation, expanding to a 100% deduction for qualified properties obtained or placed in service between September 27, 2017, and January 1, 2023. The CARES Act also authorized qualified property improvements to be depreciable over 15 years and eligible for the 100% deduction.
Qualified Business Income Deduction
The TCJA increased the qualified business income deduction to 20% and expanded eligibility for businesses. Make sure to talk with your qualified tax advisor to determine if this is a deduction you can take.
Research and Development Tax Credit
Construction firms can receive up to a 12% credit for research and development. To qualify for R&D tax credits, a construction business must spend time, money, and resources developing or improving products or processes. Qualified research must meet specific criteria and satisfy a four-part test.
PPP loan forgiveness
If your business took advantage of the Payroll Protection Program (PPP) in 2020, make sure to submit all applicable reports and forgiveness documents on time. For 100% loan forgiveness, firms must have spent a minimum of 75% of the funds on payroll and not realized a drop in staffing numbers during the required timeframe. Other applicable expenses include rent payments, mortgage interest, and utility payments.
Employee Retention Tax Credit (ERC)
The ERC has been an evolving tax credit since its introduction in 2020. The many clarifications and expansions over its lifespan could mean eligibility for your firm when you were not previously eligible. Be sure to consult your tax advisor for more information. Read more on the ERTC here.
In addition to the above credits, deductions, and other programs, smaller construction firms may be eligible for more flexible accounting methods. Suppose your firm’s gross receipts over the previous three years averaged less than $26 million. In that case, you could use cash, accrual, completed contract, or “accrual less retainage” accounting methods to aid in the timing of revenue recognition.
With only a few months left in 2021, it’s important to review your current tax strategies to make sure it is still a beneficial plan and to take advantage of anything that may have become available since the last planning session. Our team of tax professionals is ready to help! Give us a call today.