12 Tax Deductions That Can Save Construction Businesses Money
The construction industry has proven to be quite erratic, consistently riding the many waves of the economy. According to a 2018 infographic by EHS Today, $10 trillion is spent annually by construction businesses for construction services.
Consequently, construction companies in the country spend top dollar on tax. However, this does not have to be the case, because construction companies have a lot of tax write-offs to use to their advantage when tax returns are filed at the end of the year.
High taxes can culminate in negative results. When a construction business is highly taxed, it’s hard to pay good wages, there is a marked increase in the price of services, and, in extreme situations, bankruptcy and job loss ensue.
Tax write-offs or deductions occur when the amount of taxable income is reduced. It happens as a result of expenses made in order for the business to generate more income. The price of the expenses are removed from the revenue to reduce the taxable income. Below are 12 tax write-offs for construction businesses.
- Cost of Equipment and Supplies
For any equipment purchased in the year of the tax, cost is deductible if it is only used for business purposes. These pieces of equipment include those that can be reused, like saws, hammers, and drills. It does not include materials used as part of the actual construction.
Maintenance costs on the equipment during the year can also be deducted.
- Cost of Maintenance and Repairs
As a business owner, a contractor can deduct any expenses made towards repairs and maintenance of office property and equipment.
- Expenses Made Towards Transportation
Transportation is a huge part of construction and construction businesses. Labor, building materials and equipment have to be taken from the company space to the site.
Money spent on transportation is tax-deductible. For instance, if a truck is used by a construction contractor to go to and from the site, or to transport materials, its insurance, maintenance and gas expenses can be deducted. Since January 1, 2020, the IRS has permitted businesses to claim 57.5 cents on every mile driven in the course of business.
There are two methods of reporting the deductions for a construction vehicle: standard mileage write-offs or actual expenses. In the first case, the number of miles driven with the vehicle is multiplied by the standard mileage rate of the IRS. In the second, actual expenses have to be calculated meticulously to the last dollar.
- Advertising: For Hiring or Marketing
Construction businesses place advertisements for job positions available in the company so that any candidate who is interested can reach out to them.
Expenses made towards job advertisements are not to be fretted over, because they are a good opportunity for tax deduction. Hence, a contractor can claim tax deductions for paid advertising with a job agency or similar organization.
Likewise, when marketing strategies such as print and online business adverts are adopted, the expenses they incur can be deducted. The expenses may include ads from TV and newspaper, social media adverts, and website expenses.
- Health Insurance
A self-employed contractor can write off any expenses made on personal health insurance under certain conditions. The criteria required include:
- The business must be maintaining a profit.
- The contractor must have been ineligible for an employer’s health plan.
- The contractor can only get tax write-offs for the months of ineligibility.
- Depreciation of Construction Business Assets
A construction outfit owns a good amount of valuable assets like vehicles, tools and machinery. These items will inevitably reduce in value the more they are put to use. Fortunately, if properly calculated and accounted for, tax deductions can be claimed on depreciation.
It is expected that assets would be used for multiple years and will depreciate in the course of time. Many methods are used to estimate depreciation but the straight-line process calculates it based on depreciation life. Depreciation rules can get quite cumbersome — getting familiar with them can save time and extra cost generated by mistakes.
It is highly advisable to acquire the services of a professional. An accountant can be quite costly, but with expertise comes great accuracy.
- Cost of Workers’ Training Programs
Workers can be employed in construction at the entry-level with high-school diplomas. However, to go any further, they will need to get trained, in order to get necessary qualifications. Construction businesses usually assume the costs of the training programs in order to encourage workers to extend their time with the company. An example of a relevant training in the construction industry is health and safety training.
There are strict requirements by the IRS guiding the claim of deductions on workers’ training expenses. One important requirement is that the training be tailored specifically for construction and not enable workers to change to a new career. Only then can a construction company claim the deduction on it.
- Employee Wages
Expenses on labor are some of the biggest that most companies make. It is good to know that salaries paid in the fiscal year for verifiably provided services are tax deductible.
The wages of employees of a construction company can be removed from the taxable income. Deductible payments include salaries, commissions, health benefits, bonuses etc.
- Legal and Professional Service Expenses
If a construction company pays a professional to handle a specific issue, the fees paid are often tax-deductible. For instance, if an accountant is hired to manage invoices or verify balance sheets to prep a notice to owner for mechanics lien filing, the resulting expense can be deducted from the taxable income.
It is important to know that professional fees are not directly slated as deductible items in the code. They can only be deducted by a taxpayer if they happen to be “ordinary and necessary” costs relating to business expenses (§162) or the production of income (§212).
The IRS considers ordinary expenses to be those common and expected in certain businesses while it considers necessary expenses to be costs that help increase revenue.
- Travel Expenses
Business travels include any journey a distance away from one’s place of residence that is significantly lengthier than a normal day’s work and for which one will have to rest away from home.
For both contractors and employees, some accrued costs are deductible. Transportation and shipping costs, lodgings and other travel-related expenses should be well-documented along with records of expenses, the purpose of travel, dates and locations.
- Cost of Office Lease
The rent paid for construction office space qualifies for a tax write-off. If a contractor rents an office or works from home, the rent paid for the office is deductible while deductions on home spaces are calculated based on the fraction of the home used as an office.
Simply put, if 20% of one’s home space is used as an office, then 20% of the house’s annual rent is deductible on the business taxes.
- Contract Labor Expenses
Contract labor involves the usage of independent contractors. Small businesses often utilize subcontractors to meet their labor needs.
If a business pays independent contractors or subcontractors to provide certain services, those payments made qualify for tax deductions.
Conclusion
It is important that small construction businesses and contractors deduct all the expenses they can in order to reduce the amount of tax they end up having to pay.
To do this, a contractor cannot afford to be imprecise with keeping records of business expenses. Keep all receipts and invoices for equipment, travels, rent, and other expenses made throughout the year. They will come in handy when the time comes to file tax forms.
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About the Author:
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.
Photo: https://drive.google.com/file/d/182x0h2EqLpUTaA4KQxWm-Ddb0p-bALrs/view?usp=sharing
Tags: construction, Real Estate, Reducing TaxesCategorised in: Real Estate, Taxes
This post was written by Patrick Hogan