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Anita Mahamed is a CPA, CFP and a partner at Milwaukee-based Wipfli, an accounting and consulting firm that works with construction companies. She leads Wipfli’s construction and real estate practice in southern Wisconsin. Opinions are the author’s own.
April 2025 may feel like a lifetime away. And tax planning? A distant priority compared to the daily issues contractors are facing. But this is the right moment to plan for April’s filing date, while there’s still time to improve your tax position.
Anita Mahamed
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Take the time to review the tax implications of your business and operations early, so you can maximize deductions, reduce tax liabilities and maintain compliance. Proactive tax planning around work in progress, equipment purchases and energy credits could save you thousands of dollars.
To help builders get ready for their annual filing, here are some tips that can help the process. Before the end of the year, contractors should:
Review work in progress. For tax purposes, projects are considered complete once 95% of construction costs are incurred. Review current projects so you understand which will meet this criterion by year-end.
Then, determine how accelerating or deferring completion could affect your taxable income. For example, in years with higher tax rates, it may be advantageous to defer completion and push the income into a year with lower tax rates.
Assess your accounting method. Cash flow management is critical in a high-interest rate environment. Review the impacts of different accounting methods, then match your approach to your cash flow needs and project timelines. Some firms want to recognize income throughout a project to avoid a large, lump-sum tax bill, while others prefer to defer income and tax liability.
Calculate interest expense deductions. Under the Tax Cuts and Jobs Act, there’s a limit on how much interest can be deducted from taxable income. More firms could have a limited interest expense deduction in 2024 since interest rates and expenses have been higher. If limited, you may have to report higher taxable income than expected, which could mean a higher tax bill.
Consider taking the state pass-through entity election. Under current law, most owners don’t benefit from state income tax deductions without the PTE election. The PTE election allows businesses to pay and deduct state income taxes at the business level, so owners recognize less taxable income.
Cross-check common compliance issues. Make sure financial records are accurate, timely and organized before year end. Confirm estimated tax payments have been made on time and for the appropriate amounts based on actual earnings.
If you performed work out of state in 2024, make sure you understand all your filing obligations. And S-corporation owners should review their compensation before year-end to ensure it’s appropriate and tax efficient.
Focus on 2024. Political and legislative uncertainty draw a lot of attention. However, the expectations surrounding your 2024 tax returns are clear. We know where the current tax law stands, and the anticipated changes have been coming for a long time. Focus on known changes and their projected impacts.
Case in point: The phase-out of bonus depreciation under the TCJA. Based on the phase-out schedule, assets placed in service in 2024 are limited to 60% bonus depreciation. If your company can’t use the Section 179 deduction, the balance should be deducted over the asset’s useful life.
Because of the phase-out, construction firms should prepare for smaller depreciation deductions and potentially higher taxable income related to equipment and capital purchases. The phase-out continues through 2027, when bonus depreciation drops to 0%.
Prepare for 2025. TCJA provisions that sunset after 2025 require your attention now. Start to evaluate potential consequences and strategic responses before 2024 is over, so you have more options in coming years. For example:
If the $10,000 state and local tax cap, otherwise known as SALT, expires after 2025, taxpayers could claim all their state and local taxes and significantly reduce their federal taxable income liability.
Top individual tax rates will increase from 37% to 39.6%. PTE owners will lose a 20% deduction on qualified business income and face higher personal tax rates on their business income. Or, with careful planning, S-corp and partnership owners could change their legal structure to take advantage of the lower, permanent corporate tax rate, at 21%.
When the standard deduction and alternative minimum tax provisions expire, owners may not be able to claim certain tax deductions. You need to understand the implications for future tax liabilities and after-tax profits.
Meet with your CPA. Your tax advisor should advise you on available deductions and tax planning strategies, including contingency plans for tax law changes. Review projections and construction in-progress schedules with your CPA to maximize your planning opportunities.
Deadlines inspire action, but waiting until the eleventh hour could be costly. Act on what we know now, so you’re prepared for upcoming challenges and opportunities in the tax landscape.
Look for tax savings. Your work-in-progress list may include tax savings, too. If you are a new building owner or a designated designer of certain building types, you could claim up to $5.65 per square foot in 179D tax deductions or a 45L credit of up to $5,000 per unit.
Qualifying improvements typically include HVAC systems, building envelopes and lighting systems. You need to document and validate the improvements to claim deductions and credits — so start collecting certifications and reports now. Better yet, establish a process to collect tax compliance documents throughout the project lifecycle.
Ensuring compliance, taking advantage of government programs and being organized can ease the burden of annual filings come the next year.
Source : ConstructionDive