There are many opportunities to save money on taxes. Many tax provisions were implemented under legislation aimed to help businesses and individuals deal with the COVID-19 pandemic and its ongoing economic disruption. Here are six strategies to consider.

1. Take the Employer Retention Credit

This refundable tax credit can be taken against certain employment taxes. Federal income tax withholdings, the employees' share of Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes up to the amount of the credit can be claimed. Employer-paid health insurance costs may also be eligible, even if the employer has furloughed workers and is not otherwise paying wages. A maximum of $7,000 per employee per quarter for a total of $28,000 can be claimed by qualified employers in 2021 and $5,000 for the third and fourth quarters of 2020 for a total of $33,000 per employee.

2. Assess NOL carryback vs. carryforward

The CARES Act permits net operating losses (NOL) to be carried back to obtain refunds of prior year taxes. While appealing, contractors should assess the implications of this tax provision before deciding to take a NOL carryback or carryforward. President Joe Biden has stated that he intends to raise income taxes. It is important to determine if it is more advantageous to the take a carryback and refund in a year with a lower tax rate or have the NOL available for future years when income tax rates are expected to be higher. Evaluate current working capital needs along with the company’s long term financial stability before deciding.

3. Take advantage of bonus depreciation changes

The CARES Act includes a technical correction to the Tax Cuts and Jobs Act that permits 100% bonus depreciation for eligible Qualified Improvement Property placed in service after Dec. 31, 2017, and before Jan. 1, 2023. Taxpayers who placed eligible QIP in service during 2018 and 2019 may be eligible to claim 100% bonus depreciation. REITs, manufacturers, and other businesses that own certain types of nonresidential real estate improvements on leased land may also be eligible. This can help businesses, especially in the retail, restaurant and hospitality industries, improve cash flow.

4. Take the Energy Efficient Building Deduction

The Consolidated Appropriations Act of 2021 made the Energy Efficient Building Deduction (Section 179D) permanent. Business owners and government contractors can take a deduction for energy-efficient improvements to commercial and government buildings. A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install interior lighting, building envelope, or heating, cooling, ventilation, or hot water systems that reduce the energy and power costs by 50% or more. Any accrued tax deductions from these buildings can be carried-back two tax years or can be carried-forward for up to 20 years. Eligible designers and builders (such as architects, engineers, contractors, environmental consultants and energy service providers) can also qualify for 179D under a special rule for public property.

5. Use the right accounting method

Contractors should ensure that the tax reporting method for each contract is appropriate by determining which projects are not considered long-term (more than one year). Most contractors must use the percentage-of-completion method for long-term contracts, but exceptions exist. Residential builders generally qualify to use a different tax reporting method. Contractors may qualify for other elections for paid if paid contract language, unit price contracts, Guaranteed Maximum Price contracts and retainage receivable. Under TCJA, tax accounting methods previously available only to smaller contractors can generally be used by contractors with average annual gross receipts of up to $26 million (as adjusted for inflation). Choosing the appropriate method for each contract to reduce taxes is an overlooked tool.

6. Qualify as a real estate professional

Rental activities and income are generally considered passive income unless the investor qualifies as real estate professional for tax purposes. Then it is treated as non-passive income. Losses can be deducted if the real estate professional materially participates in the rental activity. More than 50% of the person’s time and 750 hours must be spent on real estate activities. Holding a real estate license is not required. Other rules apply. However, generally contractors qualify for this provision under the Internal Revenue Code. It is important to assess this as it becomes a valuable tax planning tool.

It is important to take a holistic approach to tax planning because there is a fine balance in what makes sense. Implementing one strategy may offset the benefits of another. Contractors should weigh the costs versus the benefits before implementing any strategy.

Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s).