Want to improve your financial position now and in the new year? Most owners of businesses that do bridge and road work would say “Yes!” after the challenging year that most have just experienced.
Why not take advantage of the tax strategies available to businesses like yours that could help limit the taxes you pay and take control over when you pay them?
Year end is the ideal time to review the performance of your operation over the past year and set goals for the one ahead. You should also schedule time to meet with your tax and financial advisors and accountant to find out if you qualify for tax deductions or credits that could benefit you and your business.
If you wait until after the new year, you could miss out on a few lucrative opportunities.
Speeding up some payments and putting off others may help decrease or even eliminate your tax liability. It’s critical to carefully consider the timing of all expenditures and other transactions at this time. It might even make sense to postpone certain expenses and delay receiving income until the new year. This is particularly true at the end of 2020, a year unlike any other.
Here are opportunities that you should discuss with your tax expert and other financial professionals.
Consider accelerating depreciation.
Work with your accountant to figure out if it makes sense for you to speed up the depreciation of assets.
Section 179 of the Internal Revenue Service (IRS) tax code allows business owners to deduct the cost of certain types of business equipment as an expense during the year that it’s placed into service, rather than doing so over its expected useful life. This includes most non-real estate business property, including computer software. The maximum amount of allowable Section 179 expense for 2020 is $1,000,000 on qualified property that is put into active use during the year. There is a $2,500,000 phase-out threshold. If a contractor places qualified property in service that exceeds the threshold, the total amount of allowable Section 179 expense is reduced dollar for dollar.
Section 179 is particularly attractive to newer and growing companies. If you’ve been thinking about purchasing new equipment for your business, it could be a good time to do so if you haven’t reached your allowable limit for the year and you can start using it before December 31. Your tax advisor can help you figure out if this makes sense for your situation. They can also explain certain other limits and qualifications related to Section 179 deductions.
Optimize your deduction for qualified business income (QBI).
Owners of certain non-corporate entities may be able to receive a 20% deduction on certain business income. Entities that qualify include subchapter S corporations, partnerships, and some limited liability companies. If you qualify, it could help reduce your maximum effective tax rate for 2020. Another benefit: You may be able to leverage the deduction on entity-level state and local taxes.
The QBI deduction limitations and restrictions are set at the owner level. Meet with a financial or tax expert to learn more about this relatively complex concept. Make sure you discuss the timing and distribution of income so you can maximize the deduction for this year.
Remember: If you claim the QBI deduction and do your own taxes, you must show how you calculated QBI using Form 8995. Each qualified trade or business activity must be listed on its own line on the form.
Think about whether it makes sense to sell an asset or partnership interest.
Section 1061 requires that you claim certain earnings when you sell a capital asset or part of a partnership that you’ve held for less than three years as a short-term gain rather than a long-term capital gain. Why could this mean for you? Long-term capital gains are taxed at 20%, while short-term ones are taxed at your ordinary income rate.
If you’re considering selling something that’s less than three years old, discuss it with your tax advisor. They’ll help you figure out whether it might make sense for you to unload it sooner rather than later.
Find out if you qualify for the research and development (R&D) tax credit.
It might seem like something reserved for science or medical companies, but many types of organizations qualify for this credit. If you spent any time or money developing a new or innovative way of doing the work that you do on bridges or roads, you may be able to take advantage of it.
In addition to allowing companies to write off costs incurred when developing new and improved products and services, the credit lets them offset income tax liability dollar for dollar.
To qualify, businesses must have less than $5 million in revenue and no revenue for the five years leading up to the credit year. They can take a credit against their tax liability. If they don’t have any, they can apply the credit to offset up to $250,000 in payroll taxes per year for up to five years. In order to do that, you will need to maintain records of your R&D activities to prove eligibility.
A tax professional with R&D experience can help you figure out if you’re eligible, calculate your credit amount, and help you develop the right documentation to claim it. Be aware that R&D rules will change at the end of next year, so it’s important to talk with your tax advisor now so you can leverage it under the current rules if they’re more favorable for your company.
Make sure you’re using the best accounting method for your business.
Companies with up to $25 million in gross receipts are allowed to choose one of three accounting methods. You should select the one that’s most beneficial for your current business situation. That said, as things change, it could make sense to shift to a different one.
- Cash method. This accounting method allows companies with under $25 million in gross receipts to use a relatively simple accounting process, from both a paperwork and tax point of view. However, this method may not provide an accurate or complete picture of the profitability of your business because it doesn’t take future revenue or expenses into account. What you gain in the ease of doing business, you may lose out on at tax time.
- Completed-contract method. Firms with between $10 million and $25 million in annual gross receipts may choose the completed contract method or the percentage of completion method. Be aware that there are pros and cons related to each that you should go over with your tax advisor. They can help you figure out if either will help or hurt your tax situation.
- UNICAP exemption. Businesses with gross receipts under $25 million are exempt from Uniform Capitalization Rules (UNICAP). These rules require that some of the costs of construction be capitalized as part of the structure being produced. Companies under this threshold now have the option to expense these costs while a project is being developed. This exemption is most often used by real estate developers, but an experienced tax professional can help you figure out if it could apply to your business.
It’s a smart move to discuss your accounting methods and practices with your bookkeeper at the end of every year to ensure that you’re handling things in the best way possible.
Stay on top of limitations on business interest deductions.
Deductibility of net interest expenses is currently limited to 30% of adjusted taxable income (ATI).
Through 2021, ATI must be computed without accounting for depreciation, amortization, or depletion. However, starting in 2022, those items will be included in the calculation. This could lead to a decrease in your ATI, limiting your interest expense deductibility even more. Other factors make these calculations quite complicated.
If you’re considering taking out a loan, consult with your tax advisor to find out how much of the interest will be deductible in the year ahead and beyond.
Check your tax-related documents.
Prepare for the Schedule K-1 information that you will need to complete your taxes. Beginning last year, it became more comprehensive than it had been in the past. Also check whether you have current, signed, and valid W-8 and W-9 forms from all partners, investors, freelancers, and lenders, as required.
Know your net operating losses.
If you have old net operating losses (NOLs), remember that the carryback for them was repealed for tax years after 2017. NOLs can be carried forward indefinitely. Those generated after 2017 cannot reduce taxable income by more than 80%.
Be careful about deducting entertainment expenses.
Rules around entertainment related write-offs have tightened over the years. Still, it’s possible that 50% of the cost of business meals may qualify for a deduction if certain people are present and the meals aren’t considered excessive or extravagant. Your tax expert can advise you on how to handle things properly so you don’t raise red flags at the IRS.
Considering your tax options at the end of the year can provide many benefits to your business. You need to holistically view all the opportunities available to you. Implementing one strategy may impact the benefits of another. You need to work with an expert in taxes for bridge development and maintenance companies like yours to find the ideal balance that will provide the greatest benefit to your bottom line.