The 2020-2021 tax season is unprecedented for many reasons, and it’s forcing many business owners to take a closer look at their tax situation with their CPAs to ensure all available opportunities are optimized. Much is still up in the air when it comes to presidential tax plans, future pandemic relief, and fluctuating economic strain, but construction companies can still take advantage of current tax law to reduce their tax burden this year. Here are the key tax considerations for contractors for the 2020-2021 tax filing season.
Annual tax considerations for contractors
While much is unique to 2020, there are several tax planning strategies that can be engaged at any time. Here are a few you should know:
- Research and development – If you test new techniques, products, or processes on construction jobs, or if you develop a unique assembly of construction methods and processes you could be eligible for R&D tax credits.
- Energy efficiency credits – Contractors can be eligible for up to $1.80 per square foot of energy-efficient buildings built for federal, state, or local governments. Certain energy-efficient residential properties may also be eligible.
- Qualified business income deduction – The 9% domestic production activities deduction was replaced in 2017 by the TCJA with the qualified business income deduction at 20% which is a greater deduction for contractors.
- Accounting method opportunities – Smaller construction firms have additional options for their method of accounting than just the percentage of completion (POC) including cash, accrual, completed contract, or accrual less retainage. Average gross receipts of the past 3 years must total less than $26 million to qualify for these methods. Construction firms can accelerate revenue to offset current losses, allowing them to recognize revenue now. This can be beneficial for companies concerned about rising tax rates.
CARES Act tax considerations for contractors
The CARES Act not only brought significant business funding relief options, but it also created several tax benefits that contractors can take advantage of this tax season including:
- Refundable payroll tax credit for 50% of qualified wages
- Opportunities for carrying net operating losses back to previous tax years
- Retroactive 100% bonus depreciation to 2017 for qualified improvement property
- Deduction of more business interest
It is important for contractors to maintain proper documentation and work with their accountants to realize all the tax benefits available to them through the CARES Act.
PPP and ERC tax considerations for contractors
Guidance was updated at the end of 2020 that made expenses paid using PPP funds also tax deductible, which is good news for contractors. The same legislation also made employee retention tax credits (ERC) available paired with a PPP loan. Certain criteria must be met, and employee wages paid with PPP funds cannot be claimed for the ERC. Check out our previous article on this topic.
President Biden’s tax plan considerations for contractors
Much has been discussed and reported on President Biden’s tax plans over the past few months; it is important to remember that some of these provisions will require a large majority of Senate support if they don’t qualify under budget reconciliation which only requires a simple majority. Here are some examples of President Biden’s tax proposals that could be up for legislation. Keep in mind that tax policy proposals can quickly change, and these are simply predictions based on tax proposals released up until this point.
- Corporate income tax increase from 21% to 28%
- 15% minimum tax on large corporations
- Personal income tax rate increase from 37% to 39.6% for high-income earners
- Cap on itemized deductions for wealthier Americans
- Limitations on like-kind exchanges for real estate investors
- Phase out of the 20% qualified business income deduction for high-income earners
Additionally, contractors nearing retirement will want to consider their succession plans carefully this year. Estate and gift tax exemptions are also up for review under Biden’s tax plan, and business owners may want to consider how to take advantage of current rates before changes are made.
As you file your 2020 taxes with your CPA and look toward 2021, it’s important to be proactive and prepared. Some tax changes are likely imminent, and there is no guarantee of additional resources from Congress to help deal with the coronavirus pandemic. Construction firms will want to perform careful due diligence of their contracts, closely monitor jobsites, and review all costs as we move through this tumultuous time. Work with your CPA to ensure your capitalizing on all opportunities.