How Contractors Can Reduce Their Tax Liability

A version of this article was previously published in the September/October 2017 issue of  California Constructor Magazine.

One of the greatest challenges to your company’s financial success is identifying and pursuing the right tax savings opportunities.

With marketplace competition fierce, it’s important to reduce costs so you can reinvest those savings in your business. One way to accomplish this is through various tax savings opportunities that can help reduce your tax liability while driving value to your bottom line.

Work Opportunity Tax Credit (WOTC)

The WOTC is a federal income tax credit designed to encourage businesses to hire individuals facing barriers to employment based on various criteria, such as individuals receiving government assistance.

Depending on which target group an individual belongs to, the maximum credit per new hire can range from $2,400 to $9,600. The ultimate value of the tax credit is determined by:

  • The target group under which the employee qualifies
  • The number of hours worked
  • The gross wages earned in the applicable period of employment

States are adopting similar programs that provide state-level hiring credits. Read more about the WOTC and other tax credits in our Insight.

R&D Tax Credit

Many businesses already do work that qualifies for significant R&D tax credits—and construction companies are no exception.

As the construction industry takes on additional risk, with contractors shouldering more design responsibility, it’s also moving toward the use of innovative construction materials to create more reliable energy-efficient structures.

Meanwhile, customers, architects, and engineers continue to raise the bar on innovation, driving the expectation that contractors will develop new processes and engineering solutions. Specific examples of these qualifying activities include the design and construction of the following:

  • New or improved infrastructure projects, such as bridges, dams, subsurface tunnels, and rail systems
  • Specialized machinery, equipment, and tools
  • New or improved electrical, lighting, alarm, communication, and control systems
  • Innovative buildings and associated components, such as a building envelope system or structural foundation system
  • New or improved HVAC and mechanical systems

The R&D tax credit also provides a payroll tax offset. It’s available on a quarterly basis beginning in the first calendar quarter after a company files its annual federal income tax return. As outlined in our previous Insight, new businesses that need cash can use the R&D credit for this purpose for the first five years they have gross receipts.

Learn more about how to claim the R&D tax credit in our guide.

Multistate Employment Taxes

Construction companies that have employees who travel and work in multiple states—requiring personal income tax to be withheld in each of these states—often face complex tax issues, such as:

  • Multistate personal income tax withholding
  • State unemployment insurance
  • Other state and local employment taxes

Understanding the various state payroll tax requirements can help contractors make informed business decisions and create internal policies for traveling and out-of-state employees.

Next Step

For more information about tax savings opportunities available to your business, contact your Moss Adams professional.

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