Tax planning is an integral part of running a successful construction company.

While end of the year tax planning is crucial to reducing your overall tax burden, there are certain planning opportunities that require you to take action earlier in the year. This article explores a few tax planning opportunities that should not wait until year-end.

Making an Election to be Taxed as an S Corporation

Certain C Corporations and Limited Liability Companies (LLCs – both single-member and multi-member) may benefit from making an election to be taxed as an S Corporation.

Some businesses that may benefit from such an election include:

  • C Corporations that have accumulated sufficient working capital and equity and are at a stage in their business cycle where distributions of future profits are desired without incurring the double taxation C Corporations are subject to when paying out dividends.
  • Profitable single-member LLCs where the taxpayer’s taxable income exceeds certain thresholds
  • Profitable multi-member LLCs

Timing is critical to the decision to elect to be taxed as an S Corporation as the election must be filed by March 15th of the tax year the election is to be effective. For example, for the S election to be effective for Tax Year 2023 for an entity with a Dec. 31, 2023 year-end, the election must be made by March 15, 2023.

A decision to make the election to be taxed as an S Corporation requires careful analysis and consideration as there can be many pitfalls if the decision is not well thought out and planned for.

If you think an S Corporation election may be suitable for your company, please contact a member our Adams Brown Construction Team for more information.

Quarterly Estimated Tax Payments for Entity Level State Income Taxes

As more and more states are implementing a workaround to allow pass-through business owners (S Corporations and Partnerships/LLCs) to make an election to pay various states’ income tax at the entity level instead of at the owner level, more careful tax planning will be required for contractors to maximize the benefits of this opportunity. The purpose of the entity level tax workarounds is to allow pass-through business owners to claim a federal tax deduction for the entity level state income taxes paid. If the election to pay state income tax at the entity level is not made, the state taxes are paid at the owner level, where any federal tax deduction is limited by the $10,000 state and local tax deduction cap currently in place under federal tax law.

Numerous states implemented the entity level income tax workarounds starting with 2022, and most states exempted electing businesses from a requirement to pay quarterly estimated tax payments for the entity level tax for the tax year 2022. However, starting with 2023, quarterly estimated tax payments of the entity level state income tax will be required.

Determining the amount of the estimated tax payments is complicated by:

  • the fact that making the election to pay state income tax at the pass-through entity level is an annual election for many states.
  • the fact that estimated tax payments made at the entity level are not transferable to the owner’s individual estimated tax payments.

As a result, monitoring projected taxable income for your construction company throughout the year will be more important than ever.

Section 179D Energy-Efficient Commercial Property Deduction

The Section 179D Energy-Efficient Commercial Property Deduction is a valuable tax incentive that allows businesses to deduct the cost of energy-efficient property improvements from their taxes. For construction companies that provide design services, this tax incentive provides two opportunities:

  • Construction companies can use these tax incentives to market energy-efficient design services they may offer and help their customers qualify for the Section 179D deduction.
  • For projects where the customer is a governmental entity or not-for-profit entity, the customer can allocate the Section 179D deduction to the designer of the energy-efficient property improvements. This can result in a substantial tax deduction with no out-of-pocket expense to a construction company that designs energy-efficient property improvements.

The Section 179D deduction is available for energy-efficient investments in commercial buildings, including lighting, HVAC systems and the building envelope. The deduction is based on the incremental energy savings resulting from the energy-efficient improvements and is calculated according to the square footage of the building.

To claim the deduction, businesses must obtain an energy performance score from a qualified third-party engineer or contractor. The score determines how much of the cost of the energy-efficient improvements can be claimed as a deduction.

Adams Brown partners with Source Advisors to provide Section 179D studies.

Questions?

Tax planning is an essential component of running a successful construction business. With proper planning and guidance, construction companies can take advantage of various tax incentives to reduce their overall tax burden and maximize their profits. Contact an Adams Brown advisor to help leverage opportunities and make the best decisions for your construction company.