There are many tax planning strategies a construction contractor can implement to reduce the company’s tax liability. Now is a good time to review the company’s financial goals, operations and results over the past year. Discuss what was done and how to qualify for tax deductions or credits with a construction accounting specialist.

Accelerating certain expenses and postponing others may help to decrease, or even eliminate, a contractor’s tax liability. It is important to consider the timing of all expenditures at this time of year, including bonus payments, as well as the reporting of income. It might be beneficial to postpone certain expenses and delay receiving income until the new year.

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the tax law. Contractors need to be aware of these changes and plan accordingly. Here are several tax planning opportunities that contractors may qualify for under TCJA.

Accelerated Depreciation

Contractors should determine if it makes sense to accelerate the deprecation of assets. Section 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service. The maximum amount of allowable Section 179 expense for 2019 is $1,000,000 on qualified property that is placed in service during the year. There is a $2,500,000 phase-out threshold. If a contractor places qualified property in service that exceeds the $2,500,000 threshold, the amount of the allowable Section 179 expense is phased out dollar for dollar.

Bonus Depreciation

Both new and used equipment may qualify for 100% bonus depreciation. Under TCJA, contractors cannot carryback an operating loss, but they can carry one forward indefinitely.

Partnership Audit and Adjustment Rules

New audit and adjustment rules are now in effect for tax years beginning in 2018. Careful planning could mitigate any unfavorable consequences on both the entity and the partners themselves. Take into consideration how these rules will impact any investments in partnerships that the company has made.

Percentage of Completion Method of Accounting

Small construction contracts may qualify for an exception from using the percentage of completion method of accounting for long-term contracts. To qualify, the contract must be completed within two years of the start of the contact. The contractor’s gross receipts for the prior three taxable years also cannot exceed $25 million. If both conditions are met for a contract, the builder can use the completed contract method of accounting instead. The advantage is that the contractor can defer the tax due until the job is completed.

Net Operating Losses

The carryback of net operating losses (NOLs) was repealed effective for tax years ending after December 31, 2017. NOLs can be carried forward indefinitely. NOLs generated after 2017 cannot reduce taxable income by more than 80%.

Qualified 0pportunity Zones

Contractors may defer all or part of a gain that is invested into a Qualified Opportunity Fund (QO Fund) that would otherwise be includible in income. The gain is deferred until the investment is sold or exchanged or on December 31, 2026, whichever is earlier. If the investment is held for at least 10 years, investors may be able to permanently exclude the gain from the sale or exchange of an investment in a QO Fund.

Qualified opportunity zone business property is tangible property used in a trade or business of the QO Fund. The property must be purchased after December 31, 2017, and meet the “substantially all” holding period requirement. At least 70% of the property must be used in a qualified opportunity zone during the holding period. Other rules apply.

Qualified Business Income Deduction

The Qualified Business Income (QBI) Deduction (Section 199A deduction) allows non-corporate taxpayers to deduct up to 20% of their QBI, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

Individuals, including owners of sole proprietorships, partnerships and S corporations may qualify. Some trusts and estates may also be able to take the deduction. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.

According to the IRS, QBI is the net amount of qualified income, gains, deductions and losses from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded. W-2 income, amounts received as reasonable compensation from an S corporation, amounts received as guaranteed payments from a partnership and payments received by a partner for services under section 707(a) are also not QBI.

The IRS makes it clear that the deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20% of the taxpayer’s taxable income minus the net capital gain. The deduction is available for taxable years beginning after December 31, 2017, and ending before December 31, 2025. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.

Other Considerations

The Domestic Production Activity Deduction (DPAD) was repealed under TCJA for tax years beginning after December 31, 2017.

In addition, entertainment expenses are no longer deductible under TCJA. Even so, 50% of the cost of business meals may qualify for a deduction if a contractor or employee is present at the event and the food or beverages aren’t considered lavish or extravagant.

Taking a strategic approach to tax planning can provide many benefits. Contractors need to take a holistic approach. Implementing one strategy may offset the benefits of another. There is a fine balance in what makes sense for any company. Contractors should weigh the costs verses the benefits before implementing any tax planning strategy.