For years we have worked with all types of construction contractors… everything from commercial and residential general contractors, to subs like roofers, electricians, commercial plumbers, HVAC and utility contractors. You could say it's in our blood.
You see, our founder's (Jim Trippon CPA) father was a custom homebuilder, and Jim grew up pounding nails. In fact Jim could install 3 tab shingles and roof flashing before he ever got his first drivers license, let alone before he went to college to become a CPA.
We have found that very few CPAs have a passion for the construction industry. Most don't even know that many of their contractor clients qualify for a special deduction to save them 6% on their federal income tax every year.
What we're talking about is the Domestic Production Activities Deduction (which can be deducted using IRS Form 8903). This special deduction allows many construction contractors to deduct 6% of net income derived from qualified "production" activities. There are some limitations, but most construction contractors that do new construction projects can qualify.
There has never been a more crucial time for construction contractors to pay more attention to their tax preparation and tax accounting details. By reducing their tax liability, construction contractors can protect themselves against increasing taxes and income assessments by the IRS. Here are a few tips on how to effectively reduce your tax liability in the construction industry.
- Maximize capital asset deductions. Recent tax laws have increased the fixed asset cost expense up to $250,000 for construction contractors. Construction contractors can take advantage of this deduction as long as less than $800,000 of the company's assets are in service within the given year.
- Capital Gains & Dividend tax rate increases. Under the current law, expect it to change with the new presidential administration, capital gains and dividend are taxed at 15%. This issue is something that you will definitely want to consult with your tax CPA. These tax rates are under close watch Congress and the presidential administration.
- Tax Rebate. Most of the economic stimulus checks have been delivered. However, there are additional funds that may be available. The economic stimulus checks were actually an advance on the 2008 tax liabilities. The amount of each person's check was based on income from 2007 & 2008. So if there was significant changes in income there may be additional rebate funds that are available.
- Depreciation Deductions. Investments in equipment can be partially deducted in the first year of use. Contractors are allowed to deduct ½ of the cost investments made in a calendar year during the first year of use. Construction contractors can then depreciate the remaining half of the asset purchase over its normal useful life.
- Beware of the "Kiddie Tax." Since most construction contracting companies are family owned and operated, the kiddie tax has been extended to require excess unearned income of full-time students under 24 years of age, to be taxed as marginal income at the parent's current tax rate. This may not apply if the student's earnings equal ½ of their support. You will definitely want to consult with your tax CPA regarding retirement planning options and monetary gifts to avoid increasing your tax liability on dependents over 18 years of age.
If you would like to work with a CPA firm that understands the construction industry and will work hard to make sure you do not pay a penny more than you owe give us a call at 713-661-1040.
At Trippon & Company CPAs we use our 30 years of experience in construction industry to minimize your Federal tax liability. Call us at 713-661-1040 and put our experience at work for you TODAY!