Construction Accounting Article -
5 Year End Tax-Saving Opportunities for Contractors

Target Audience: Construction Industry Professionals, Year End Tax Planners

Tax planning is an ongoing process that contractors should monitor throughout the year. That said, year end is the perfect time to review your financial situation and see what you can do to lower your tax bill. Here are five ideas to consider:

1. Review your year and act accordingly. If your construction business is using the cash basis method of accounting and you’re having a good year, look to ramp up your expenses to offset your income. For example, if you prepay several months of rent before Jan. 1, the payments will count as a 2006 expense.

Conversely, if you haven’t had the best year and, thus, may be in a lower tax bracket, you may want to accelerate some income into 2006 to benefit from the lower tax rate and delay your expenses for what you hope will be a larger deduction next year. You might see whether you can get customers with large balances to pay up by offering a nominal discount for payment before Dec. 31.

2. Put off billing, step up collections. If you operate under the accrual basis method of accounting, you must record income and expenses when they’re earned and incurred, regardless of when you receive or spend the cash.

To delay some of this income for tax purposes, consider waiting to send some bills until after the first of the year. Also, step up collection efforts — you might be able to deduct bad debts.

3. Sweeten purchases with Section 179. If you’re looking to make a big purchase before year end, keep in mind the Section 179 deduction. Under it, you can fully deduct up to $108,000 of business property placed in service in 2006. The phaseout limit is $430,000.

Even if you’re a cash basis taxpayer, you need not pay for the equipment before year end to take the Sec. 179 deduction. You can pay for fixed assets in the following year as long as you place them in service by year end. As always, consider whether a large purchase makes financial sense for your construction company rather than buying something just for a tax break.

4. “Manufacture” some tax savings. Commonly known as “the manufacturers’ deduction,” the Qualified Production Activities Deduction (QPAD) allows you to deduct 3% of taxable income from qualified production activities. These include certain construction, engineering and
architectural services. (This amount will rise to 6% next year.) The deduction is limited to 50% of wages you report on employees’ W-2 forms.

5. Save green with energy-related credits. Homebuilders can really benefit from the tax breaks in the 2005 Energy Tax Act. For each
energy-efficient residence built in 2006, these contractors are eligible for a credit of up to $2,000. Another energy-related tax break is the business or personal credit of up to $3,400 for the purchase of a qualifying hybrid passenger car or light truck.

As you can see, you have many options when it comes to year end tax planning. Setting aside some space on your crowded calendar to choose the strategies that are right for your construction business will no doubt turn out to be time well spent.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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