You may have already filed your construction business’s federal tax return for the 2021 tax year. Or maybe you’ve requested an extension while you pull together more documentation. Whatever the case may be, now’s a good time to identify some tax-saving fundamentals while the topic of taxes is fresh in your mind.
Document advertising/marketing spending
Have you had to step up your efforts to get your company’s name out there? If so, be sure to document expenses carefully. Your construction business can write off money spent on print and online advertising, as well as digital channels such as Facebook.
You also can claim expenses associated with producing marketing materials, such as video equipment and paper for printed materials. Business cards, radio spots, event sponsorships, and website design and maintenance all qualify as advertising expenses as well.
Track asset purchases, depreciation costs
Businesses can generally deduct the cost of office supplies and other items in the tax year purchased. Meanwhile, you can deduct the cost of certain assets over multiple tax years. Such capital investments — big-ticket machinery, equipment, software, and vehicle purchases — begin to lose value through use and age. This lost value is known as depreciation.
Claiming depreciation is a critical tax-saving activity for construction companies. The two major tax breaks to be aware of are: 1) Section 179 expensing, and 2) bonus depreciation. The rules related to each have been affected by recent tax law changes; we can explain the latest benefits and requirements.
Claim net operating losses
When a trade or business’s deductible expenses exceed its income, a net operating loss (NOL) generally occurs. You can write off an NOL as either:
- A carryback, which generates an immediate tax refund, or
- A carryforward, which allows you to apply the NOL to future years when your tax rate might be higher.
The NOL rules have always been complicated and multiple law changes have complicated them even further. Again, meticulous documentation is critical.
Consider the R&D tax credit
This last point isn’t so much a tax-saving fundamental as what one could call a “stretch goal.” The federal credit for increasing research and development activities — popularly known as the R&D credit — can be a valuable, though challenging, tax break for contractors.
Like any tax credit, it lowers your tax liability dollar-for-dollar. So, it’s particularly valuable. By claiming the R&D credit, your business can reduce its federal and state income taxes by a percentage of the eligible expenses incurred for qualified activities. For construction companies, these activities may include:
- Design improvements for greater energy efficiency or reduced environmental impact,
- Experiments involving new building materials or equipment, and
- Development of unique construction methods and processes, and developing or improving construction equipment.
However, the calculations and administrative burden associated with the R&D credit are typically difficult. Nevertheless, if you’re intending to undertake some research activities in the months ahead, your efforts might really pay off come tax time if you follow the rules.
Don’t forget that you can still amend your 2021 return if you’ve already filed. Beyond that, tax planning should be a year-round activity for contractors. We can help you identify and claim all the tax breaks available to your construction company.