Construction businesses are usually very busy during the summer months. A little forethought and planning during this busy time could make the difference when tax time rolls around.
Below are four reasons to consider midyear tax planning.
1. Equipment Acquisition
The Section 179 deduction allows you to expense, rather than depreciate, up to $25,000 in new equipment acquisitions for 2015. The deduction applies to machinery and equipment, including office equipment and light trucks that are put in service before year end. It also applies to certain software purchases.
NOTE: The $25,000 dollar limitation could change, considering the amount was also $25,000 for the 2014 year and was increased to $500,000, retroactively, in December 2014.
The equipment does not have to be new — it just has to be new to you. To qualify, it must be used at least 50% for business in the first year you own it. You can deduct only the business-use percentage of the cost, and for vehicles there are weight-related limits on the deductible amounts.
2. Tracking Job Progress
Now is a good time to start thinking about where your projects will stand at year end. If you use the completed-contract accounting method (available only to smaller construction businesses), you cannot deduct job costs or record income until the job is complete.
Look at your overall tax and business situation to see if it may be better to delay completion of some jobs so you can report the income next year. Conversely, it may be better to make sure all jobs are finished by year end so you can deduct the costs this year.
If you use the percentage-of-completion accounting method, you report income and expenses as they are incurred. In this case, there may be tax advantages to pushing delivery of some materials to next year — if you can do so without hurting job progress. More specifically, because the goods aren’t delivered to the job site, you do not incur the costs and, therefore, you may recognize a lower percentage of gross profit for tax purposes. (Of course, this assumes there will be a gross profit and not a loss.)
3. Hire Your Kids
Do you have children on summer break from school who are old enough to work? If so, you may hire them and fully deduct their pay. And, if your construction business is unincorporated and has no owners other than you and certain family members, and your children are under age 18, you would not owe payroll or unemployment taxes on their wages.
Your kids get a tax break as well. They can earn as much as $6,300 (the 2015 standard deduction for singles) and pay no federal income tax. They can tack on $5,500 more tax-deferred if they contribute it to a traditional IRA. Bear in mind that your children must perform actual work and receive wages reasonably similar to what a nonfamily employee would receive.
4. Strategic Planning
For many contractors, the summer months are “busy season.” It is understandable that tax planning may not be on your list of priorities right now, yet it’s the best time for some strategic moves. For instance, as you and your CPA go over your finances, looking for potential tax breaks, you may realize that business isn’t going as well as you expected. The good news here is that there’s still time to adjust. You can look into cutting expenses or maybe seeking out smaller jobs rather than a big one that could stymie your cash flow. And if you are doing better than you planned, great! You’ll be able to consider equipment purchases, computer upgrades, investments and other moves to grow your company.
What’s Best for the Business?
Midyear tax planning is, indeed, an excellent business practice. But it comes with a caveat: Never make a move for tax purposes if it isn’t also a good business move. Your CPA can help ensure that you are acting prudently from both perspectives.