For many construction industry business owners, they are concerned with the day-to-day activities that keep their business running. For example, hiring help for a new project or purchasing a new piece of equipment to replace an outdated one. Many owners tend to focus on the daily grind and put off thinking about the taxes until January or February, but doing so, may come at a cost. Success in the construction industry requires the ability to understand and prioritize accounting and tax planning.
Below are commonly missed tax deductions and credits construction industry business owners should take advantage of:
1. Research & Development (R&D) Tax Credit
- This tax credit was originally enacted in 1981 to incentivize companies to increase their investment in developing new or improved products or processes.
- For a construction business to be eligible for this tax credit, they must meet a four-part test set forth by the IRS:
1. Qualified purpose - to develop new or improved products or processes resulting in increased performance, function, reliability, or quality.
2. Technological in nature - relies on the principles of hard science, such as engineering.
3. Development of a new or improved component - may include processes, software, techniques, formulas, or inventions.
4. Substantially all constitute experimentation - testing and evaluation
- What are qualified research expenses?
- Wages paid to employees for qualified services.
- Supplies used and consumed during the R&D process.
- Research expenses paid to a third party.
- Research payments to qualified education institutions and various scientific research organizations.
- Research and experimentation can occur anywhere, not just in laboratories. Whether on a job site, or in the office, the R&D credit is available to those researching new ideas or improving existing ones to make a job more efficient. The federal credit may be carried forward for 20 years or have the potential to offset payroll tax.
2. Work Opportunity Tax Credit (WOTC)
- Hiring people from targeted categories and employing them for at least 120 hours may qualify your construction company for the WOTC. This program is designed to increase employment opportunities for individuals who typically experience certain barriers to employment.
- The WOTC provides employers a nonrefundable tax credit for a portion of wages paid before January 1, 2020, to certain new employees who qualify as members of disadvantaged groups.
- Disadvantaged groups include:
- Qualified IV-A Recipient
- Qualified Veteran
- Designated Community Resident
- Vocational Rehabilitation Referral
- Summer Youth Employee
- Supplemental Nutrition Assistance Program Recipient
- Supplemental Security Income Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
- If it is determined they qualify for the WOTC, the employee must complete IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) on or before their start date. This form MUST be postmarked within 28 days of the start date and sent to the state Department of Labor for Certification. This form is used to make a written request to the state workforce agency to certify an individual as a member of a targeted group.
- Depending on which target group the individual belongs to, the maximum credit per new hire may range from $1,200 to $9,600.
3. 199A Tax Deduction
- The Tax Cuts and Jobs Act (TCJA) created a new deduction for pass-through business owners. This deduction, in certain situations, may provide up to a 20 percent tax deduction on qualified business income.
- For taxpayers with taxable income exceeding $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations.
- Whether a specified service trade or business
- Taxpayer’s taxable income
- The amount of W-2 wages
- Unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
There are an abundance of tax saving opportunities available to construction industry business owners that extend beyond what is listed above. It is important to review your tax planning strategies to ensure you are in the best position possible.
Smith Schafer is a recognized leader in providing accounting, auditing and consulting services to the construction and real estate industry. Our Construction Group, comprised of numerous professionals, is committed to serving over 500 Minnesota construction and real estate entities. For additional information, click here to contact us. We look forward to speaking with you soon.