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Anita Mahamed is a CPA, CFP and partner at Wipfli, a Milwaukee-based accounting and consulting firm that works with construction companies. He leads Wipfli’s construction and real estate practice in southern Wisconsin. The opinions are the author’s own.
April 2025 may seem like a lifetime away. And tax planning? A distant priority compared to the day-to-day problems faced by contractors. But now is the right time to plan for the April filing date, while you still have 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 ahead of time, so you can maximize deductions, reduce tax liabilities and stay compliant. Proactive tax planning on work in progress, equipment purchases and energy credits can save you thousands of dollars.
To help builders prepare 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 to understand which will meet this criteria by the end of the year.
Next, determine how accelerating or deferring completion could affect your taxable income. For example, in higher tax rate years, it may be advantageous to defer termination and push the proceeds to a lower tax rate year.
Rate 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 companies want to recognize revenue over the course of a project to avoid a large, lump-sum tax bill, while others prefer to defer revenue and tax liability.
Calculate interest expense deductions. Under the Tax Cuts and Jobs Act, there is a limit to how much interest can be deducted from taxable income. More companies could have a limited interest expense deduction in 2024 as interest rates and expenses have been higher. If it’s limited, you may have to declare higher taxable income than expected, which could mean a higher tax bill.
Consider the choice of state conveyancing entity. Under current law, most owners do not 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.
Check for common compliance issues. Make sure financial records are accurate, timely and organized before the end of the year. Confirm that estimated tax payments have been made on time and in the appropriate amounts based on actual earnings.
If you worked out of state in 2024, make sure you understand all of your filing obligations. And S corporation owners should review their compensation before year-end to make sure it’s appropriate and tax-efficient.
Focus on 2024. Political and legislative uncertainty attracts a lot of attention. However, the expectations surrounding your 2024 tax returns are clear. We know where the current tax law stands, and the planned changes have been coming for some time. Focus on known changes and their projected impacts.
Case in point: the phase-out of bonus depreciation under the TCJA. Under the phase-out schedule, assets placed in service in 2024 are limited to a 60% bonus. If your business cannot use the Section 179 deduction, the balance must be deducted over the life of the asset.
Because of the phase-out, construction companies should prepare for smaller depreciation deductions and potentially higher taxable income related to equipment and capital purchases. The phase-out continues until 2027, when bonus depreciation drops to 0%.
Get ready for 2025. Provisions of the TCJA that sunset after 2025 require your attention now. Start assessing potential consequences and strategic responses before 2024 ends, so you have more options in the years ahead. For example:
- If the $10,000 state and local tax limit, also known as SALT, expires after 2025, taxpayers could claim all of their state and local taxes and significantly reduce their federal taxable income liability.
- The maximum individual tax rates will increase from 37% to 39.6%. PTE owners will lose a 20% deduction for qualified business income and face higher personal tax rates on business income. Or, with careful planning, S-corp and partnership owners could change their legal structure to take advantage of the permanent, lower corporate tax rate of 21%.
- When the standard deduction and alternative minimum tax provisions expire, homeowners 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 ongoing construction projections and 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 the next challenges and opportunities in the tax landscape.
Look for tax savings. Your to-do list may also include tax savings. If you are a new building owner or designated designer of certain types of buildings, you could claim up to $5.65 per square foot 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 must document and validate the improvements to claim deductions and credits; so start collecting certifications and reports now. Better yet, establish a process for collecting tax compliance documents throughout the project lifecycle.
Ensuring compliance, taking advantage of government programs and getting organized can ease the burden of annual applications next year.
