Now, before the end of the year, it is possible to make the moves that will reduce tax bills even lower than the point the economy may have driven them to for construction materials producers and contractors.
The question is how to make the moves necessary for those low tax bills before the end of the tax year and in the face of all the current uncertainty over tax reform, rates and deductions.
Write-offs
Rare is the construction materials producer or contractor that doesn’t purchase equipment, computers, vehicles or other assets in the course of a year. For those considering buying a new piece of equipment or upgrading technology, the time to do so is before Dec. 31.
While the tax law offers the opportunity to depreciate those items over their useful life, faster write-offs are possible, allowing a 100 percent write-off for those with profits that require reduction. Of course, not all assets qualify for the faster depreciation write-offs.
Buildings and their structural components aren’t eligible, nor is property that isn’t “placed in service” and not actually used in 2022. On the plus side, producers and contractors can now deduct or depreciate 100 percent of the cost of a vehicle or truck.
Remember, though: Bonus depreciation is currently 100 percent but is scheduled to be gradually phased out by the end of the 2026 tax year. That means bonus depreciation will be only 80 percent for assets placed in service in 2024.
Abandon, don’t sell
If equipment or other assets have no value to the business, the benefits of abandoning them might outweigh the benefits of selling them.
Abandonment could generate an ordinary, fully deductible loss, rather than treating the loss as a capital loss, which is subject to limitations. Of course, abandonment must be documented and the property really abandoned.
Repairs
The cost of making repairs to both equipment and business premises should be tax deductible – if made before Dec. 31. It is not too late to update an operation’s policy for differentiating repairs from capital expenditures to comply with the updated regulation.
Small businesses lacking applicable financial statements (AFS) can take advantage of a unique de minimis safe harbor by electing to deduct smaller purchases ($500 or less per purchase, or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Small businesses with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance and improvements to eligible buildings.
Don’t forget those carryovers
Deductions for capital losses, net operating losses (NOLs), home office deductions and even large charitable donations that cannot be fully used in one year may be carried forward to future years. Because these items have a way of slipping through the cracks, make sure to track these deductions and note carryovers from the current tax year’s return.
Most taxpayers no longer have the option to carryback an NOL, and although an NOL can now be carried forward indefinitely, it is limited to only 80 percent of the operation’s taxable income.
Provide a retirement plan
Offering a retirement plan can go a long way to keep employees happy while serving as a magnet for needed new workers in today’s labor crunch.
Not only can a retirement plan help retain talent, when the operation provides a qualified retirement plan or a 401(k) plan, but there are specific employer contributions and administrative fees that can be tax deductible.
As one example, eligible employers may be able to claim a tax credit – a dollar-for-dollar reduction of their tax bill rather than a deduction – of up to $5,000 for three years for the ordinary and necessary costs of starting an SEP (Simplified Employee Pension), SIMPLE IRA or other qualified plan such as a 401(k). While in some cases actual contributions to these plans can be made after the end of the year, they must be established prior to the end of the year.