As the industry kicks off 2021 and begins to emerge from the COVID-19 pandemic, contractors should consider the following questions to determine if they have taken advantage of all available tax elections.

Can our company take NOLs?

The Tax Cuts and Jobs Act limited the availability of net operating losses (NOL) by permitting companies to offset 80% of income and repealing the use of NOL carrybacks. With the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, losses occurring in 2018, 2019 and 2020 can be carried back up to five years and offset up to 100% of incomes on carrybacks or carryforwards through the end of 2020.

What energy-efficient improvements were made in 2020?

If energy-efficient HVAC, building envelope and lighting assets were installed, the section 179D deduction might be applicable. This deduction is $1.80 per square foot and applies to new construction and renovation of qualifying commercial and apartment buildings. It is available to contractors and designers that worked on eligible government-owned buildings.

Does our company own qualified improvement property (QIP)?

QIP was ineligible for bonus depreciation until recently. With the passage of the CARES Act, nonstructural interior building components like alarm systems, drywall, and plumbing are depreciated over 15 years and are eligible for bonus depreciation. This change is retroactive to 2018. Contractors can amend prior-year returns.

Can the Employee Retention Credit be taken?

The Employee Retention Credit is 50% of qualifying wages up to $5,000 per employee for pay periods through year-end.

What paid leave credits can be claimed?

Paid leave credits are available for pay periods through year-end. There are two significant COVID-19 credits: paid sick leave and paid family leave, which fully reimburses employers for wages paid to employees while on qualified leave. Paid leave wages used to claim the credit cannot be deducted.

Should payroll taxes be deferred?

The CARES Act allows employers to defer the employer portion of Social Security tax deposits (6.2% of wages) for payroll periods that end between March 27, 2020, and Dec. 31, 2020. Half of the deferred deposits will be due on Dec. 31, 2021, and the remainder will be due on Dec. 31, 2022. No penalty or interest will accrue.

A similar deferral is offered for the employee portion of the Social Security tax. Unlike the deferral of the employer portion, the employee share must be repaid in early 2021. Employers are required to withhold ratably from employee's paychecks these deferred amounts between Jan. 1, 2021, and April 30, 2021. Employers who are unable to collect will be responsible for paying deferred taxes or subject to interest and penalties.

Can officer salaries be optimized for the QBI deduction?

When individuals' and couples' taxable incomes exceed $163,300 and $326,600 in 2020, respectively, their 20% qualified business income (QBI) deductions may be limited based on W-2 wages. This applies to owners of pass-through business entities. Therefore, this does not apply to C-Corporations. Owners of specified service trades or businesses will lose their deductions if their W-2 wages are not high enough. If salaries are too high, the QBI deduction will not be maximized.

Even though the QBI deduction affects individual income taxes, businesses can help their owners increase their deductions by adjusting officer salaries. Increasing or decreasing officer wages can make a larger QBI deduction. Officers/owners might need to be careful about increases in taxable income. The extra tax may offset the benefits of a larger QBI deduction, and for certain business structures, officer compensation has to be deemed reasonable.

Is our choice of business entity still serving us?

The entity type selected at the onset of the business may no longer be best. Take a close look at the business structure before year-end and see if a change in entity type is warranted.

Change is not necessarily bad, but it does require contractors to stay alert and be open to shifting business strategies. Fortunately, many of the tax planning tools discussed above are mechanisms contractors can use to help control taxable income.