From Tax Planning to Compliance, Here’s How to Prepare for a Successful New Year

Key Takeaways:
  • Leverage bonus depreciation and Section 179 expensing before year-end to maximize tax savings.
  • Monitor potential tax law changes to make informed financial decisions for 2025.
  • Prepare for increased IRS audit scrutiny by ensuring compliance with long-term contract accounting and other tax rules.

 

As the end of the year approaches, it’s time for construction business owners to take a comprehensive look at their operations. Year-end isn’t just about tax planning—it’s about setting your business up for success in the coming year, from assessing project profitability to tackling compliance requirements and planning for tax savings.

In the construction industry, where projects span multiple years and cash flow can fluctuate, preparing for year-end is important. Ensuring your financials are in order, addressing new reporting obligations and optimizing tax deductions are just a few key items to review. This isn’t just about avoiding penalties or catching up on paperwork; it’s about maximizing the gains from the hard work you’ve put in all year.

Here’s what construction business owners need to prioritize as the year comes to a close.

Timing of New Tax Legislation

With a shifting political landscape, it’s important to stay informed about which provisions might be extended and which proposals are unlikely to move forward.

Likely Provisions to be Extended in 2025 Tax Legislation:

  • 20% Qualified Business Income Deduction – Beneficial for pass-through entities, this deduction could provide significant savings if extended.
  • Increase to the $10,000 Cap on State and Local Tax Deduction – Currently capped at $10,000 for individuals and trusts, an increase could provide relief for business owners.
  • Extension of Lower Individual Income Tax Rates – Keeping income tax rates lower could have a favorable impact on personal earnings.
  • Extension of the Higher Estate Tax Exemption – For 2025, the estate tax exemption is set at $13.99 million per individual (indexed for inflation), offering a larger exemption for high-net-worth individuals.

Tax Provisions Discussed in the 2024 Election NOT Likely to be Enacted:

  • Repeal of Income Tax and Replacement with Tariffs – This proposal has gained little traction.
  • Taxation of Unrealized Gains – Targeted at taxpayers with over $100 million in net wealth, this proposal is also unlikely to move forward.

Keeping an eye on these potential changes can help you make informed decisions about structuring your finances and choosing deductions wisely.

 

  • Act Now on Bonus Depreciation & Section 179 Expensing

In 2024, bonus depreciation remains available at 60%, but it will continue to phase down over the next few years, reaching 0% by 2027 unless extended. Additionally, Section 179 allows for immediate expensing of qualifying property, with limits set at $1,220,000 for 2024. For construction businesses, this is a tool for deducting the cost of equipment and other essential assets.

Take Action:

  • If you’re planning on acquiring new equipment or property, aim to have it purchased and in service by Dec. 31 to maximize your 2024 deductions.
  • Consider conducting a cost segregation study if you’ve made substantial building improvements this year. This could separate certain assets into shorter-life categories, qualifying them for faster depreciation.

 

  • Consider Additional Year-End Tax Planning Moves

To optimize your tax position before the end of the year, there are several additional strategies to consider:

  • State Tax Payments: Prepaying state income tax or property tax could yield a valuable deduction, but accurate projections are essential to avoid overpaying.
  • Bonuses and Retirement Contributions: Paying year-end bonuses and contributing to retirement or profit-sharing plans by year-end can reduce taxable income and provide motivation for your workforce.
  • Charitable Contributions: Donations made by Dec. 31 can be deducted, allowing you to support causes you care about while potentially lowering your tax liability.

 

  • Stay Informed on Audits and Enforcement Trends

Federal tax audits are becoming more frequent, partly due to the hiring of additional IRS agents funded by the Inflation Reduction Act. Construction companies are often a target for audits due to the complexity of their accounting methods and long-term contracts.

Tips to Minimize Risk:

  • Ensure you’re following the appropriate accounting method for long-term contracts. The IRS is paying close attention to contractors who don’t properly apply the percentage-of-completion method or miscalculate Alternative Minimum Tax (AMT) adjustments.
  • Be aware of Section 174 requirements for research and experimental costs, which must now be capitalized and amortized over five years.

Start the New Year on a Solid Foundation

The end of the year is more than just a time to tie up loose ends; it’s an opportunity to strengthen your company’s financial footing and prepare for growth. By addressing each item above, you’re setting yourself up for a successful and resilient 2025.

If you’d like guidance in any of these areas, contact an Adams Brown construction advisor.