5 Best Tax Deductions & Business Write Offs for Construction Contractors
What are the BIGGEST tax write offs for construction companies?
How do we really reduce taxes?
There's a great deal of articles written about what the top write offs are for construction companies & general contractors.
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Here's a List of Tax Write Offs Usually Listed:
- Safety Gear and Uniforms: Includes hard hats, steel-toed boots, gloves, and any job-specific uniforms.
- Travel Expenses: Costs for public transport, rental cars, lodging, and meals during business trips.
- Vehicle Costs: Deductible expenses include fuel, maintenance, insurance, and registration fees if using the actual expense method.
- Education Costs: Costs for job-related courses and seminars, plus student loan interest.
- Home Office: Deductions for a portion of mortgage or rent, utilities, and home insurance.
- Tools and Equipment: Purchase and maintenance of hammers, drills, and other job-specific tools.
- Advertising: Costs for online ads, business cards, flyers, and signage.
- Phone Expenses: Portion of the phone bill used for business calls.
- Professional Fees: Legal and accounting services related to the business.
- Labor Costs: Wages paid to employees and payments to subcontractors.
This list is fine, it'll lead you to a list of the foundational tax write offs.
But this is common sense stuff, we want to talk about significant tax write offs.
How do construction companies reduce their taxes?
Are there loopholes available to reduce your business taxes?
Here are the foundational 5 Best Tax Write Offs for Contractors & Construction Companies
#1 Tax Write Off - S-Corp vs. LLC
The first major way construction companies can reduce their taxes is by converting from a sole proprietorship, and converting to an S-Corp.
You can convert a Sole Proprietorship to an S-Corp, but filing a 2553 S-Election form.
S-Corporations Might Enjoy Reduced Social Security & Medicare Taxes.
Before you convert to an S-Corp, 100% of your net profits will be subject to the Self Employment taxes or medicare and social security.
You'll only owe social security taxes, or the 12.4% tax, on income up to the social security limit.
Social Security Limit Increases Over the Years:
So you'll pay 12.4% on your income up to $168,600 in this year 2024, and it will continue to climb.
This is the tax that funds social security retirement and social security disability support.
Before Becoming an S-Corp, 100% of your income is subject to the 15.3% SE Tax
After converting to an S-Corp, only the salary you pay yourself is subject to SE Tax.
You'll Pay Yourself a Salary in an S-Corp.
It's seems kind of strange, but your company will pay you a "reasonable" salary from your corporation, and then you'll get owners distributions.
The Salary or Payroll IS subject to the 15.3% SE Tax.
The Distribution is Not subject to the 15.3% SE Tax.
An S-Corp has the capabilities of reducing SE Tax liability significantly.
Here at CBW, we help Construction Companies balance their QBI, their S-Corp salary and their retirement plan contributions to ensure they're being as tax efficient as posisble.
Converting to an S-Corp might save you $2,000 - $15,000 a year - depending on your situation.
To reduce taxes as a construction contractor - you must explore utilizing an S-Corp.
#2 Biggest Tax Write Off for Construction Contractors: Retirement Plans
If you have employees, you'll need to provide your W-2 employees options for retirement plans, but besides that, the IRS tax law is setup to help companies provide retirement plans to their employees.
Small Business Retirement Plans are SUPER tax efficient
You might be able to write off $52,000, and put it rigth in an investment account.
Small Business Retirement Plans have two types of contributions:
2 Types of Retirement Contributions:
- Employee Contribution
- Employer Contribution
The employee contribution is where the employee defers their salary, making it tax deferred in the year of the contribution, and then they'll pay tax when they withdraw.
This is pretty common.
What's not as common, is the employer contribution.
Remember that "match" your employer used to make to you?
Well, now your company can provide that same "match" or other employer contribution, to you the owner!
There are many rules, regulations and stipulations - so you'll want to work with CBW as your tax advisor, and probably find a great investment guide.
Types of Retirement Plans for Small Business:
- SEP IRA
- Simple IRA
- Defined Benefit Plan
- 401k
- Solo 401k Plan
These have various levels of flexibility, but you should know that they can provide massive tax savings.
One of the biggest tax write offs possible is a retirement plan contribution.
Remember - if you have employees, they'll need to get similar options, and you'll want to work with a good advisor.
You might want to call Vanguard or Schwab for options for small business, along with inexpensive index funds.
#3 Biggest Tax Write Off - Hiring Your Kids
We won't get too in the weeds here, but your minor children are allowed to work in the family business.
Those kids will enjoy the standard deduction on their pay.
That means, for the most part, the first 14,000 or so in income will be tax free.
If the children are working for a NON-S-Corp - they might not even be subject to social security or medicare taxes FUTA.
Children working for parents in an S-Corp or partnership will have to pay FUTA.
Now, you're kids must be legally yours, be minors, and then participate in the business legitimately.
You must pay them properly, there needs to be duties and appropriate pay for the position and experience.
In other words, they'll actually need to work and you'll have to keep track of their activty.
#4 Biggest Construction Write Off - New Equipment
The equipment you purchase is a massive tax write off.
You'll need to depreciation everything you buy over $2,500 (or other rules).
The tractors, technology and vehicles you use to produce profits are business tax write offs.
Bonus Depreciation -
Sometimes you can take something that would be depreciable over many years, and write them off in one year.
The government will allow "bonus depreciation" to help small businesses and bolster the economy with spending.
If you want to grow your business, you'll want to invest in more equipment & better equipment.
#5 Write off for Construction Contractors - Buy & Hold Real Estate
Passive income from a rental property is not subject to social security or medicare tax.
Besides that, you'll be able to use depreciation & cost segregations, to lower the taxable income more.
Along with these tax advantages, you'll also be able to use the banks' mortgage to buy a property, which will provide income and tax advantages right away, while simultaneiously having the potential to increase in value.
Appreciation, depreciation & the passive-income is all a major reason to buy rental property.
Your S-Corp Can Rent From You!
If properly structured, your S-Corp can rent from your LLC holding the rental property
This would allow you to legally shift income from an entity subject to Social Security & Medicare Taxes, over to one that's not-subject.
There are many stipulations and rules, so please reach out to get a tax reduction strategy done right.
One main thing to note is that your down payment is NOT deductible, and that you'll only want to invest in rental property that is a good investment.
Please Book a Tax Reduction Analysis Today!
