Smart Tax Strategies Every Contractor Should Know
When it comes to building a profitable contracting business, most owners focus on sales, estimates, and project execution but often overlook one critical area: taxes. In a recent episode of the Hammer & Grind podcast, Brad sat down with Cody Daniels from Builders Tax Group to explore key tax strategies that can make a significant financial impact for contractors.
Here are the main points from the conversation, along with actionable steps for contractors to consider.
Key Insights
1. The Importance of Specialized Tax Knowledge
Cody emphasized the necessity of hiring a tax professional who specializes in the construction industry. Many contractors make the mistake of working with generalist accountants who may not be aware of the specific tax strategies available to them. Specialized knowledge can lead to significant tax savings and better financial planning.
2. Cost Segregation Studies
One of the standout topics was cost segregation, a tax strategy that allows property owners to accelerate depreciation on certain components of their real estate. By identifying elements like flooring, cabinetry, and land improvements, contractors can write off a substantial portion of their property costs in the first year rather than over 27.5 or 39 years. This can lead to significant tax savings, especially with the recent reinstatement of 100% bonus depreciation.
3. Understanding Accounting Methods
Cody pointed out that many contractors misunderstand the accounting methods available to them. For instance, the percentage of completion method is often required for financial reporting, but there are other methods, like the completed contract method, that can defer tax liabilities. Understanding these methods can help contractors manage their tax obligations more effectively.
4. Research and Development (R&D) Tax Credits
Another valuable insight was the availability of R&D tax credits for contractors. Many believe that R&D credits are only for tech companies, but contractors can qualify for these credits by investing in new construction techniques or improving processes. The recent tax law changes have made it easier to claim these credits, providing a dollar-for-dollar reduction in tax liability.
5. The New Tax Bill and Its Implications
Cody discussed the implications of the recent "One Big Beautiful Bill" that reinstated 100% bonus depreciation and made it permanent. This means that contractors can write off the full cost of qualifying equipment and property improvements in the year of purchase, significantly impacting cash flow and tax planning.
Action Steps for Contractors
1. Hire a Specialized Tax Professional
If you haven't already, consider hiring a tax professional who specializes in the construction industry. Look for someone who understands the unique challenges and opportunities that contractors face. This investment can lead to substantial tax savings and better financial management.
2. Conduct a Cost Segregation Study
If you own real estate used for your business, explore the possibility of conducting a cost segregation study. This can help you identify components of your property that qualify for accelerated depreciation, allowing you to maximize your tax deductions in the first year.
3. Review Your Accounting Methods
Take the time to review your current accounting methods. Consult with your tax professional to determine if you are using the most beneficial method for your business. Understanding the differences between the percentage of completion method and the completed contract method can help you manage your tax liabilities more effectively.
4. Explore R&D Tax Credits
If you are investing in new construction techniques or improving processes, investigate whether you qualify for R&D tax credits. Consult with a specialist firm that can help you identify eligible activities and quantify the associated costs.
5. Stay Proactive with Tax Planning
Don't wait until the end of the year to address your tax situation. Engage with your tax professional early in the year to develop a proactive tax strategy. This will allow you to take advantage of opportunities and make informed decisions that can positively impact your bottom line.
Taxes may not be the most exciting part of running a contracting business, but understanding them can mean the difference between breaking even and breaking through. With Cody Daniels' advice, you now have a roadmap to optimize your tax position and keep more of what you earn.
Resources
Grab Brad's tell-all book: The Contractor Profit Blueprint
