As the season for year-end tax planning approaches, the possibility of tax reform means it’s essential for individuals and business owners to consider a wide variety of tax strategies to best position themselves for the future.
The plan, which aims to simplify the tax code, lower the business tax rate, and grow the economy, could significantly impact taxpayers if adopted. That said, sound tax planning—especially in the face of such unpredictability—is essential to effective wealth management for those who work, own, or do business in the construction industry.
If Congress acts to lower future tax rates, the value of normal tax deferral strategies will become increasingly valuable. This is because you’ll ultimately pay taxes at future rates that are lower than today’s tax rates—resulting in potentially permanent tax savings.
Tax Deferral Strategies
Construction companies have a unique opportunity to build tax deferral and savings strategies into their current year operating results through reduced tax payments. To do so, general contractors and subcontractors need to analyze their tax accounting methods by answering the following questions:
- Do you want to defer profit on contracts that are less than 10% complete? This could be as easy as making an election.
- Do you have retainage receivable—the net of retainage payable—at year-end on short-term contracts? For contracts started and completed within the same tax year, this net difference could be deferred, if you qualify.
- Do you have large retainage payable balances at year-end? Certain contractors qualify to have these amounts excluded from the percentage-of-completion method of revenue recognition for their current year taxes, allowing them to defer income to future years.
- Do you have large accounts receivable compared to your accounts payable? If so, you may qualify for the cash or hybrid methods of accounting and can defer this income until cash is received.
- Do you have residential contracts where 80% of costs are incurred building structures with more than four dwelling units used for nontransient purposes? You may be able to defer 30% of the profits on such jobs, including apartment complexes, condos, barracks, prisons, and dormitories, until they’re completed.
- Do you have home contracts where 80% of your costs are incurred building structures with four or less dwelling units used for nontransient purposes? You may be able to defer 100% of the profits on these jobs, including single family homes, townhomes, and duplexes, until they’re completed.
- Are you a small contractor with average gross receipts under $10 million for past three years? There are numerous additional methods and opportunities available to you, such as the completed contract and cash methods.
Explore other tax considers for 2017 in our complete guide. We cover personal income tax, credits and deductions, wealth management, and some business-related topics. Read the complete guide or print the PDF.
We’re Here to Help
The method you choose for performing a contract is instrumental to its level of success. Tax methods for construction companies are no different, with the potential to capture permanent tax savings often resulting from the method you choose. Please contact Kelli Franco, Michael Hurst, or Glenn Wattum for more information.