QWhat tips can builders follow to make end-of-year tax filing go
smoothly? What changes have gone into effect since last tax year?
A: By far the most important tip we can give to any builder is to make sure your financials are up to date and you know where you stand on a monthly and yearly basis as it relates to your income. The new tax law that came into being on January 1st, 2018, allows for additional deductions related to capital expenditures in the form of bonus depreciation and, most importantly, the up to 20% deduction “off the top” of your construction related income. There are several calculations, many of them difficult, that go into this deduction and it is well worth your time and money to meet with your tax advisor in the fall to see how your company can take advantage of this.
Generally speaking, the tax rates have gone down overall so you will more than likely see a decrease in your taxes. However, situations vary greatly and that is why it is critical this year to meet with your tax advisor sooner rather than later. This is the first major tax overhaul since 1986, so a number of unknowns persist on the implementation of the law.
QAre there any benefits to builders in current tax
codes? If so, what are those and how do they incentivize small business owners?
A: The Tax Cuts & Jobs Act of 2017 was a huge win for builders! These days, with any significant law changes, there are always winners and losers. As a builder, your business income is considered a Qualified Business Income, meaning that even with the phase outs on the 20% deduction, your company will still receive a benefit to this while certain service-based businesses (i. e. Accountants unfortunately…) are phased out and cannot receive any benefit from this. The phase out starts at a Married Filing Joint income of $315,000 and phases out at $415,000 of taxable income. Using a simple example, if a builder makes $450,000 and a lawyer makes $450,000, the builder could potentially deduct 20% (i. e. $90,000) from their income while the lawyer gets no deduction whatsoever.
In addition, section 179 depreciation expenses have increased from $500,000 to $1,000,000 and 100% bonus depreciation on certain types of fixed assets have also expanded. Therefore, if you have a significant tax bill and are planning on doing investments in your company, you may want to consider doing it this year to decrease your tax bill. As an example, if a builder purchases a new truck that has a GVW over 6,000 pounds but less than 14,000 pounds, they can take up to a $25,000 deduction the first year in depreciation.
Another benefit of the new law relates to the UNICAP requirements. Previously, if you had $10,000,000 in sales over a 3-year period you were required to capitalize certain costs related to the production of homes; this can be a complex and costly calculation since it takes expenses off of the profit and loss statement and requires that you capitalize them into inventory. Fortunately, the new requirements have raised this cap to $25,000,000.
QWhat write-offs are commonly unknown or
overlooked by builders?
A: Builders basically live out of their trucks and a lot of builders used to write this off through their miscellaneous itemized deductions. With the new tax law, these deductions have been eliminated so it is very important that your company set up what is called an accountable expense plan and get reimbursed by the company. This is a very clean way to make sure that expenses that you used to deduct can still be deducted. In addition, we see some builders fail to follow the completed contract method of accounting for the projects they are working on. When this is properly implemented, it helps the business owner match up costs to revenue properly. This is where the advice of your tax advisor becomes critical.
QWhat parameters are important for builders to keep in mind before purchasing a new piece of equipment for their company?
A: With the new tax law, investment in capital expenditures are now mostly deductible for most builders. However, the government is only giving you a portion of the money that you are spending in tax savings so the rest of