We've compiled a list of tax tips that might be a big help to you if you're in the construction industry. We all know the world of accounting is ever-changing and that is why we want to keep you in the loop when it comes to the latest rules and regulations. We hope this information will provide you some insight into this industry’s latest rules on tax filings.
1. Take full advantage of capital asset expense deductions
Expense rules originally designed for small businesses were significantly reduced from previous years. For 2014, the rules allow contractors to expense up to $25,000 of 2014 fixed asset costs, provided less than $2 million of assets were placed in service throughout the year. This applies to both new and used assets. However, this deduction cannot be taken if a contractor is already in a tax-loss position.
2. Section 179-D deduction for government-owned buildings
In the past several years, Congress and recent administrations have placed a great huge emphasis on green building initiatives. This tax incentive relates to the design and installation of energy efficient interior lighting, HVAC, hot water, or building envelope systems in commercial buildings.
Qualifying businesses can receive up to $1.80 per square foot in deductions for eligible projects placed into service any time from 2006 to 2014. In addition, designers of government-owned buildings can also get the benefit under a special rule for public property. Eligible designers include architects, engineers, or design-build contractors who have done energy efficient design work for new government buildings or renovations/retrofits of existing government buildings.
There are multiple methods to securing a deduction and as well as different levels of deductions, depending on the energy efficiency levels that your project meets. Reducing energy and power by as little as 10% in some cases Energy and power reductions of as little as 10%, in some cases, can result in very substantial tax savings. It's critically important that you examine and exhaust all of the partial and fractional qualification methods in order to maximize your benefit.
3. Examine capital asset depreciation methods and lives
Depreciating fixed assets is one of the most complex aspects of tax law. Understanding and properly applying these rules can accelerate income tax deductions which often lead to a significant increase in and these deductions often add significantly to the current tax flow. For contractors who have under-reported prior depreciation, recent IRS guidance allows “catch-up” deductions with an automatic change in accounting method.
4. Consider establishing a separate entity to own and lease fixed assets used in the business
Often referred to as leasing or procurement companies, these entities help manage assets and may significantly reduce sales and use tax, which is collected and remitted regardless of whether a company is profitable.
5. Maximize Section 199 deductions
The Section 199 domestic production activities deduction is a unique tax incentive available to most contractors. This incentive allows taxpayers to deduct nine percent of qualifying production activities, which includes the construction or substantial renovation of domestic real property. A full nine percent deduction can reduce your effective federal tax rate by about three points, from a maximum of 39.5% to 36.5%. However, it is a complex area of tax law and the IRS has elevated the issue to its highest level of scrutiny. Check to make Be sure you are taking full advantage of this deduction within the allowable guidelines.
6. Research and Experimentation Tax Credits
In June 2014, the IRS changed the tax code to allow taxpayers to use the alternative simplified credit (ASC) method on amended tax returns if that taxpayer has not claimed the research and experimentation (R&E) tax credit on their original tax return. This rule change could mean significant savings for those taxpayers who have not been claiming the credit in the past, but are entitled to it. This ASC calculation may be greatly beneficial to companies who have gone through changes in business models or economic changes in the industry where their proportional spending on R&E, relative to gross receipts/sales, has not kept pace in recent years. Finally, with this change to the final regulations, taxpayers that do not possess sufficient historical financial and engineering records to claim the credit on amended returns can now use the ASC method, which requires records only from the previous three tax years. If you are currently performing research and development activities or have been in the past five years, this may be a good candidate to secure these R&E tax credits in the current tax year and the three years prior.
7. Create your own Captive Insurance Company (CIC)
Congress wants small and medium sized businesses to own their own insurance company, known as a captive insurance company (CIC). In the mid 1980s, Congress passed captive insurance legislation that established the 831(b) tax election for small insurance companies. This legislation opened the door for many small and mid-sized business owners to enjoy the same benefits of CIC ownership that large corporations had enjoyed since the 1950s. There are many benefits to creating a CIC. One benefit is that premiums are paid from the parent/affiliate company to the captive with pre-tax dollars, and will accumulate tax-free as reserves of the captive (up to $1.2 million annually). Captive reserves can be translated into virtually any other type of asset (some domiciles have restrictions). Hence Such premiums paid to the captive are in effect a "transfer of wealth" and are protected from the parent/affiliate company's creditors and lawsuits. Another benefit is that when/if the CIC is closed and liquidated,; the tax savings can be significant depending on the circumstances. This type of arrangement can be used for estate planning, retirement, and/or retention of key employees.
8. Determine whether your company can lower property taxes
A property tax review can ensure that real and intangible property is excluded from the personal property tax base. In addition, there may be opportunities to lower property tax valuations on real property. The review would not only generate savings in the first year, but also in future years.