Construction Tax Deductions: A Quick Guide

Tax deductions offer a lot of opportunity for construction businesses to lower their tax liability, helping to free up cash flow and increase profitability. Because construction projects are so complex, tax deductions in the construction industry are nuanced, but there are many opportunities to use tax deductions for more effective financial management.

This article discusses some of the most common construction tax deductions, plus a few of the ways contractors can make deductions work for them.

Of course, contractors should always consult with their accounting team and tax professionals on all the rules about tax deductions so that they don’t get behind in tax payments.

Top Tax Deductions for Construction Businesses

Tax deductions are business expenses that can be subtracted from a contractor’s gross income to reduce the business’ taxable income. Because there are so many expenses that go into construction business operations, tax deductions can be a significant tool in helping control contractors’ tax liabilities, saving them money that can be reinvested into the business and improving cash flow.

Vehicle and Travel Expenses

Contractors and their employees tend to move around a lot. Travel from one jobsite to another, trips between office and field and supply runs can all add up to a lot of driving — and a lot of driving-associated costs. Construction businesses can deduct vehicle costs incurred in the course of business activities, including vehicle payments, fuel expenses and a portion of insurance premiums, as long as the vehicle is used for business more than half of the time.

If construction laborers or managers are working away from home, the company may be able to write off hotel and meal expenses as well.

Contract Labor

It’s not only on-staff employees who offer up tax deductions. Payments to any independent contractors, from website design to subcontracted plumbing specialists, are all eligible for deduction from taxable income.

Tools and Equipment

The cost of purchasing or renting tools or equipment may be tax-deductible, too, as long as they are necessary for a construction project. Large equipment purchases like cranes and trucks can be depreciated over time, offering a substantial tax benefit throughout their life spans.

Office Expenses

Construction companies need offices where teams plan and manage the administrative side of their projects. Rent, utilities, furniture and office supplies like paper and ink may all be eligible for tax deductions — as are advertisements, websites and business cards. Any software, including project management tools, are tax-deductible too.

Administrative costs like accounting, bookkeeping and even tax preparation are also tax-deductible expenses.

Safety Gear and Uniforms

The cost of protective clothing and safety equipment is deductible, as these items are essential for maintaining workplace safety and compliance with industry regulations.

Training and Education

Continuing education courses, employee upskilling and safety courses are deductible expenses, and may offer a valuable bonus for contractors who champion ongoing learning. Union dues are also deductible expenses.

Insurance Costs

Insurance premiums are required costs for construction work and are eligible for tax deduction.

Unpaid Invoices

If they're owed money, contractors who can prove they’ve taken every effort to collect on their invoices may be able to claim them as a business expense.

How to Maximize Construction Tax Deductions

Business expenses add up really fast in construction, so contractors can really benefit from any relief from taxes. Here are some tips to make the most of your deductions.

Maintain separate business and personal expenses.

It’s common for business owners to use their personal credit cards, bank accounts and lines of credit for their business purposes. However, co-mingling expenses could make it harder to track all of the business expenses that are eligible for tax deductions. 

Keeping separate accounts can help keep everything straight. It’s also a good idea to track all of the expenses for the business in some kind of software on a regular basis so that all eligible expenses are accounted for.

Keep solid records.

Keeping solid records of all business expenses is absolutely critical to maximizing tax deductions. Copies of receipts and invoices along with descriptions of the expenses being deducted make sure the accounting team can make the most of deductible costs and the contractor remains compliant with IRS rules.

Project management software helps lessen the burden of all that record keeping. Many apps allow employees to snap photos of their receipts with a mobile device, ready for immediate uploading. Tech tools help keep track of deductible purchases and reduce manual inputs.

Seek out a tax professional who specializes in construction.

When in doubt, seek help from the experts. Tax professionals have a thorough understanding of IRS tax rules, and it can be extra beneficial to work with a tax pro who already understands the ins and outs of the construction industry. Accountants have an uncanny ability to decrease taxable income, putting money back into the cash flow where it can help run a construction business.

Keep an ear out for changes to tax laws and new tax credits.

Tax laws can change, and when they do, they can allow for new deductions or take old ones away. Contractors may be eligible for some tax credits, too. Applying for tax credits like those that are available to builders of energy-efficient homes or contractors who hire individuals from specific disadvantaged groups can help reduce the tax burden.

Recognize income strategically.

Businesses that use cash accounting methods may be able to delay recognition of income until after the fiscal year to put off paying taxes on that income. They can do that by delaying invoicing until after the new year. Further, they can go ahead and pay their materials or subcontractor invoices before year-end to further reduce taxable income for that period.

Plan tax strategies ahead of time.

Taxes aren't just for tax season: Some of the tactics contractors can use to reduce tax burdens involve year-round efforts.

However, some, like timing invoices strategically, require that construction teams understand what their tax bill is likely to look like for that year, and then decide if they need to shift the income into or out of that year. That requires some planning and foresight. Tax projections completed with enough time before year-end — such as at the beginning or middle of Q4 — can help move things around strategically.

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Use Construction Industry Tax Deductions to Reduce Tax Bills

Contractors have enough ongoing bills and expenses on their hands. Tax deductions can help reduce construction industry tax burdens, but contractors need knowledgeable accountants and tax professionals to help them take advantage of tax law. 

Contractors should review their business taxes with their tax professional so that they understand what’s being done on their behalf. Every deduction a contractor claims should be backed up with plenty of records in case of an audit. Tech tools can make it easier to upload copies of receipts and allot expenses to the appropriate project electronically. 

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