Construction Company Tax Deductions Tips

Taxes are necessary for any business and construction companies are no exception—that’s why learning the newest and best tax-saving strategies for construction companies is so important.

Tax laws and regulations are always changing. It can be challenging to navigate the tax landscape and ensure you’ve maximized your deductions while staying compliant.

We’ll explore some of the top tax strategies for construction companies and show you some practical tips on implementing them.

Claim your ERC tax credit for construction companies

The Employee Retention Credit (ERC) is a tax credit that was created as part of the CARES Act to help businesses impacted by COVID-19. Construction companies might be eligible for the ERC if they experienced a significant decline in revenue due to the pandemic.

A small business of just five employees could claim more than $200,000, even if you didn’t pay that much in taxes.

The credit was designed to help businesses stay afloat while keeping employees on payroll during the pandemic. Businesses can still claim the credit until around April 2025 by amending 2020 and 2021 tax returns.

To be eligible for the ERC, your business operations have been fully or partially suspended due to a government order related to COVID-19 or you’ve witnessed a considerable plunge in gross receipts in 2020 or 2021 compared with the same quarter in 2019.

To claim the ERC credit, don’t go it alone. Get the help of an experienced CPA with knowledge of how to legally get your maximum credit.

Find a CPA/tax expert

One of the most effective things you can do to develop an effective tax strategy is to work with a tax professional.

A good tax professional—not just a CPA—can help you navigate the complex tax landscape and find ways to maximize your tax savings.

When choosing a tax professional, look for someone with experience working with construction companies. They should be familiar with the tax laws and regulations that impact your business and have a solid track record of helping construction companies save money on their taxes.

Research & Development (R&D) tax credit

The Research & Development (R&D) Tax Credit is another tax incentive that can benefit construction companies. This credit encourages companies to invest in research and development activities that lead to new products, processes, or technologies.

Construction companies may be eligible for the R&D Tax Credit if they engage in activities such as designing new buildings, developing new construction techniques, or experimenting with new materials.

To claim the Credit for Increasing Research Activities, you must meet certain eligibility requirements and file Form 6765.

Energy-efficient building deductions

The Energy-Efficient Building Deduction is a tax deduction that can be of special interest to construction companies.

These tax laws allow you to deduct the cost of energy-efficient building improvements—designed to encourage companies to invest in green building practices and reduce energy consumption.

Construction companies frequently claim deductions of up to $1.80 per square foot for buildings that meet certain energy efficiency standards.

You must meet certain eligibility requirements to claim this deduction and file Form 8908, Energy Efficient Home Credit.

Tax advantages of owning a home

If you own a home and use it for business purposes, you might be able to take advantage of certain tax deductions. These deductions can help you save money on your taxes and reduce your overall tax liability.

For example, if your home includes a home office that you use exclusively for purposes related to your construction company, you might be able to deduct a part of your home expenses. These expenses could include such items as mortgage interest, property taxes, and utility bills.

To claim the Expenses for Business Use of Your Home deduction, you must meet certain eligibility requirements and file Form 8829.

Pro Tip: Are you worried about qualifying for a mortgage if you write off too many expenses? Learn about these no-tax-return home buying and refinance programs meant to help self-employed individuals:

• Bank Statement Mortgage
• 1-year Self Employed Mortgage
• Bank Statement 2nd mortgages
• No-Doc Liquidity-Based loans
• 1099 Mortgage
• DSCR Loans for investment properties

Work opportunity tax credit (WOTC)

This useful tax law encourages businesses to hire individuals from certain target groups, such as veterans, ex-felons, and individuals receiving government assistance.

Construction companies may be eligible for the Work Opportunity Tax Credit (or WOTC) if they hire individuals from these target groups. The credit can be worth up to $6,000 per employee and can help offset the costs of hiring and training new employees.

You must meet certain eligibility requirements to claim the credit and file Form 5884, Work Opportunity Credit.

Donate business assets to charity

Donating business assets to charity is another way to save money on your taxes while giving back to your community. If you donate business assets, such as equipment or supplies, to a qualified charitable organization, you may be able to deduct its fair market value on your tax return.

To claim the deduction, you must meet certain eligibility requirements and file Form 8283, Noncash Charitable Contributions. Remember that the deduction is limited to the fair market value of the donation and cannot exceed 50% of your adjusted gross income.

Deduct startup costs

If you are starting a new construction business, you might be able to deduct certain startup expenses on your tax return. Startup costs include expenses such as legal fees, accounting fees, and marketing expenses that you incur before you start your business.

To claim the deduction, you must meet certain eligibility requirements and file Form 4562, Depreciation and Amortization. Keep in mind that the deduction is limited to $5,000 in the first year and must be amortized over 15 years.

Vehicle and mileage deduction

If you use your vehicle for your construction company purposes, you might be able to deduct certain expenses on your tax return. These expenses include such things as gas, maintenance, and insurance.

Construction company owners will typically figure out the number of car expenses to deduct using one of two methods—an actual expense method or a standard one. However, it is also possible to use both methods, but you should likely do the calculations for both versions before making your decision.

For the standard mileage rate (current), you should refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Which is better to hire? W2 or 1099?

As a construction business owner, you might hire employees and independent contractors to work for your business. Each type of worker has its own upside and downside, and it is important to understand the tax implications of each.

Employees are typically hired on a W2 basis and are subject to payroll taxes and other employment taxes. Independent contractors are typically hired on a 1099 basis and are responsible for paying their own self-employment taxes.

There is no one-size-fits-all answer to which is better to hire. It depends on your business needs and goals. However, it is prudent to carefully consider the tax implications of each type of worker before making a decision.

Be smart with your income

Effective tax strategies are crucial for construction companies to stay competitive and profitable.

By understanding the tax landscape for construction companies, claiming tax incentives such as the ERC and R&D Tax Credit, working with a CPA-slash-tax expert, and taking advantage of tax deductions and credits—you can realize the maximize benefits of your tax savings and keep more money in your pocket.

Remember, every dollar you save on taxes is a dollar you can invest back into your business.

My Perfect Mortgage does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. Consult advisors before filing taxes or engaging in any transaction.