As the weather begins to cool and contractors begin to look ahead to 2022, business owners in the construction industry still have an opportunity to evaluate their company’s 2021 operations and explore potential tax planning or tax savings opportunities before the end of the year. We have summarized some of the opportunities that are uniquely relevant to the construction industry below.
Research and Development (R&D) Tax Credits
As we discussed in a previous blog, many construction contractors are unaware that their activities potentially qualify for R&D tax credits. Qualifying R&D tax credits are a dollar-for-dollar reduction of a company’s federal, and potentially state tax liabilities.
Fuel Tax Credits
Included in the price of every gallon of fuel purchased in the United States are varying federal and state taxes. These federal taxes are imposed to fund the upkeep of roadways, bridges, etc. However, businesses that purchase fuel for off-highway business use are able to claim a dollar-for-dollar tax credit against the business’ income tax liability. The fuel tax credits are calculated based on an IRS determined amount per gallon of fuel purchased for off-highway use. Common uses of off-highway fuel include excavators, bulldozers, graders, pavers, cranes, and generators. Businesses simply need to track purchases of on-highway fuel separately from off-highway fuel to accurately calculate this credit.
Work Opportunity Tax Credits (WOTC)
The WOTC is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment. The credit is potentially equal to $2,400 per eligible employee hired. Targeted groups include (but are not limited to) the following:
- Certain qualified veterans
- Qualified SNAP / TANF Recipients
- SSI Recipients
- Long-term unemployed
For a full list of targeted groups as well as the details behind qualifications, please review this article.
To claim the credit, the employer must complete IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) within 28 days of hiring an employee from a targeted group.
Section 179 / Bonus Depreciation
Arguably, the most popular tax planning tool available to capital-intensive business owners is the §179 deduction and the First Year Bonus Depreciation deduction. A summary of the 2021 rules (as of this writing) are as follows:
- 179 Deduction – For 2021, business can immediately deduct the cost of qualifying new and used equipment and qualified improvement property of up to $1,050,000 (up from $1,040,000 in 2020). The availability of this deduction begins to phase out as businesses place in service assets in excess of $2,620,000.
- First Year Bonus Depreciation – This deduction is available after the §179 spending cap is reached and is again equal to 100% of the cost of eligible new assets acquired during the year. Eligible assets are those with a tax life of 20 years or less. There is no limit on the amount of bonus depreciation that can be claimed in 2021.
Both of the above deductions merely accelerate or decelerate the timing of expensing business assets. Deducting the cost of newly acquired assets in the year of acquisition may serve to save considerable tax in the short term, however, without consistent capital investment future years may see increased tax liabilities.
Every business’ tax situation is different. McKonly and Asbury has a team of experts that are able to help your business navigate these tax savings and tax planning opportunities. For more information on these services and more, be sure to visit our Construction Services page as well as our Tax Services page and don’t hesitate to reach out to contact us with any questions.