The nature of the construction industry gives construction companies some unique chances to employ tax deferral and savings strategies, allowing you to reduce your tax hit for this year when you prepare your taxes in early 2019.
Here is a quick overview of some of the factors you’ll need to consider if you’re planning on using any tax deferral strategies for your construction company.
Accounts receivable versus payable: If you have large accounts receivable compared to your accounts payable, there’s a chance you qualify for hybrid or cash accounting methods, meaning you’re able to defer that income until you actually have the cash on hand. If that cash doesn’t come in until after the New Year, you don’t have to worry about claiming it on your 2018 taxes.
Retainable payable balances: If, at the end of the year, you have large retainable payable balances, you may be able to have those amounts excluded from your current year taxes if using the percentage of completion method of revenue recognition. This allows you to put that income off to a future year if you wish.
Residential contract deferrals: There are some types of residential projects that may allow you to defer some of your profits. If, for example, you have contracts in which 80 percent or more of the costs are incurred building structures that have more than four dwelling units, you might qualify for deferrals of 30 percent of the profits on these jobs. Examples include apartment complexes, dormitories, condominiums and other permanent residences. You’re able to continue taking those deferrals until the project is complete.
Home contract deferrals: There are some more specific types of deferrals available for residential contracts that are small homes. If 80 percent of the costs are for building structures with four or fewer dwelling units, such as single family homes, duplexes and townhomes, you’re able to defer all of the profits you make on those jobs until the job is completed.
Gross receipts under $10 million: Smaller contractors have some extra deferral strategies available to them that the larger contractors cannot take advantage of. If you have average gross receipts of less than $10 million for each of the last three years, there are a variety of deferral methods and other tax savings opportunities available to you, which a financial planner and tax prep specialist can tell you more about.
Retainage receivable: If, at the end of the year, you have retainage receivable on short-term contracts, you can defer that net difference, so long as those contracts were started and finished in the same tax year.
These are just a few of the tax deferral strategies that are available for construction companies. To learn more about the options you may be able to benefit from with your business, contact us at Patin and Associates today.