There’s just one thing I can’t figure out. My income tax! -Nat King Cole.
Nat King Cole wasn’t the only one who struggled with his income taxes. The federal tax code has grown from 400 pages at its inception in 1913 to more than 70,000 pages today. A National Taxpayers Union Foundation (NTUF) study in 2015 found that taxpayers spend more than $200 billion each year complying with the tax code. The amount is greater than the GDP of Pakistan, Portugal, or Ireland. The same study also found that more than 90% of taxpayers must rely on tax preparers or tax preparation software to comply with federal tax requirements.
At Foster Financial CPA, we’re here to take the mystery out of tax preparation. In this article, we’ll discuss 5 little-known tax breaks that may contribute to a lower tax bill for construction companies.
Out-of-pocket Charitable Contributions.
The statistics indicate that charitable giving among Americans represents 2% of GDP. However, individuals who claim the charitable deduction must itemize their deductions on Form 1040, Schedule A.
The charitable deduction may be claimed for up to 50% of AGI (Adjusted Gross Income) for donated ordinary income property and up to 30% of AGI for donated capital gains property. To increase the chances of claiming the deduction, individuals should confirm with the IRS that the institution is eligible for tax-deductible contributions. In case of an audit, a taxpayer must be prepared to show receipts of all charitable contributions, even those made in cash.
While construction companies cannot deduct the value of the time spent in charitable enterprises, they can deduct for expenses such as transportation costs, parking/toll fees, and supplies. Construction companies that donate salvaged building materials should choose organizations that have tax-exempt status. The organization’s Form 990 “Return of Organization Exempt From Income Tax” will indicate whether it has such a status. Additionally, companies are required to fill out Form 8283 Section B and hire an independent IRS-certified appraiser if donated materials equal more than $5,000 in value. Fortunately, the appraisal fees will be tax-deductible in such an instance.
Trade Show Expenses.
Trade shows can increase a company’s visibility and provide lucrative networking opportunities. Expenses incurred from trade shows, however, can also lead to a lower tax bill. Some trade show expenses that are tax-deductible are event admission fees, lodging charges, transportation costs, business telephone calls, laundry/dry-cleaning charges, convention booth charges, parking/toll fees, and mileage. For the 2016 tax year, construction companies can deduct 54 cents per mile traveled.
Three little-known deductions are the bonus depreciation deduction, the Section 179 deduction, and the Section 199 deduction. As part of the “Protecting Americans From Tax-Hikes Act of 2015,” Congress extended until 2019 the Section 179 and bonus depreciation deductions. Bonus depreciation (taken after the Section 179 spending cap is reached) allows construction companies to deduct 50% of the amount spent on new equipment, while Section 179 allows for 100% deduction on both new and newly purchased used equipment. The 2017 tax year spending cap for Section 179 is $2,000,000, and the cap for the amount written off is $500,000.
Another little-known deduction is the Section 179D deduction (The Energy-Efficient Commercial Buildings Deduction), which allows for a deduction of up to $1.80 per square foot for energy-efficient construction and renovation projects. Unfortunately, the Section 179D deduction expired on Dec 31, 2016. To date, three bills have been introduced to extend the life of the deduction: HR 6360, HR 6361, and HR 6376. HR 6376 is particularly noteworthy: it aims to allow private 501(c)(3) non-profits, partnerships, and S-Corporations to take advantage of the deduction.
Meanwhile, the Section 199 deduction currently allows manufacturers and construction companies to deduct up to 9% of their taxable income for construction or renovation of commercial, residential, and institutional buildings in the United States.
Many taxpayers don’t realize that they can deduct expenses considered “ordinary and necessary” to their jobs. Currently, taxpayers who itemize can deduct job-related costs that exceed 2% of their AGI. According to the IRS, deductible expenses include professional journal subscription fees, medical examinations, Chamber of Commerce dues, business liability insurance premiums, vehicle maintenance charges, vehicle insurance fees, vehicle gas expenses, malpractice insurance premiums, tool/supply costs, cellphone/computer depreciation costs, travel/lodging/meal costs, and legal fees. It must be noted, however, that all claimed deductions should be job-related.
The Trump Administration’s Proposed Tax Reforms.
The White House has proposed several new changes that will affect the construction industry. Among the changes it wants to institute are the elimination of the corporate AMT (Alternative Minimum Tax) and the reduction of corporate taxes from 35% to 15%. The Trump administration also favors the elimination of most corporate tax expenditures to accommodate this lowered rate; so the bonus depreciation and Section 199 deductions may be on the chopping block as corporate tax rates decrease. Construction companies can take heart, however. While the Trump administration favors reducing most corporate tax expenditure deductions, it wants to increase the Section 179 maximum deduction of $500,000 to $1,000,000. With this new cap, smaller to mid-sized construction companies will be able to increase their investments in heavy machinery and equipment.
Trump has also proposed a one-time repatriation tax, which he hopes will bring back more than $2 trillion in offshore funds. The corporate tax savings could benefit the construction industry in terms of increased capital investment and infrastructure projects.
At Foster Financial, it’s our mission to keep up with tax trends and to lower your tax burden. Call us for more information; we’ll be happy to help.