Unexpected tax challenges have been a long-standing issue for construction companies, adding an extra layer of stress to every tax season. We interviewed a construction company and tax professional specializing in construction to get to the bottom of unexpected tax challenges construction businesses face in 2022.
Section 179D of the Internal Revenue Code has made it possible for qualified construction businesses to deduct $1.80 per square foot in taxes for installing energy-efficient systems in commercial buildings. Thanks to the Consolidated Appropriations Act of 2021, this incentive is now permanent.
However, proving eligibility for this incentive can be difficult. “Each tax year it seems that the rules for what qualifies for these deductions change”, shared Volodymyr Barabakh, Co-Founder and Project Director of Structural Beam.
In fact, the eligibility requirements for 179D have been amended five times since its effective date in 2005.
“Although this incentive has done its job in motivating us to carry out more frequent installations of energy-efficient systems in buildings, we regularly struggle to prove that projects fall under the scope of being tax-deductible in this way,” says Barabakh, “It’s vitally important that construction leaders stay on top of how this scheme develops, particularly if they carry out a lot of these types of works and have these deductions factored into their annual budget.”
Subcontractors are often hired as 1099 workers to fill in open spots on construction projects. However, this could cause challenges for construction companies come tax time.
“Due to tight margins in construction forces, many contractors and construction company owners to take shortcuts and pay people as independent contractors instead of W2 workers, where they are required to pay matching Social Security, Medicare, FUTA and state Unemployment insurance.”, Navjeet Chahal, an IRS Enrolled Agent specializing in construction taxes, informed, “Several Contractors end up paying people on 1099 but don't pay them on W2. As a result, they are not withholding or paying proper payroll taxes, and even workers compensation on their behalf.”
Incorrectly classifying workers not only puts you at risk of having to back-pay payroll taxes but may also allow misclassified workers to claim company benefits, such as retirement plans.
Hiring a Labor Law/Tax Attorney is often advised to ensure workers are classified properly according to the IRS and state laws.
“Many general contractors and construction company owners fall prey to not keeping all the documents organized,” shared Chahal. Most contractors receive invoices and receipts from subcontractors, workers, and supervisors while they are working in the field, making it easy to misplace or lose records.
The IRS requires record retention in case your business is hit with an audit or has any accounting discrepancies. The Flexbase Card allows you to file, track, and collect receipts and invoices on a digital platform, so you never lose important documents again.
Keeping track of inventory and purchases is a common issue in the construction industry. One that has been exacerbated by material shortages caused by the COVID-19 pandemic. One survey showed that 83% of contractors experienced product delays in 2021 due to COVID-19, which can affect the year in which projects are completed.
Tracking your beginning inventory, purchases, and end inventory for construction projects is a vital part of paying the correct amount of income taxes for the correct year. “Many contractors don't take the time to accurately calculate their beginning or ending inventory and several don't keep track of their purchases, especially if they are not paid yet,” Chahal stated. “This results in major problems when it comes down to paying correct income taxes in the correct year.”
If you own a construction firm that operates in more than one state, you may have multi-state tax obligations. Typically, a state where your construction company has a physical presence will expect income and payroll taxes. However, different states have different thresholds for what is considered a physical presence.
Not staying up-to-date with state nexus laws can result in improperly filing state income and payroll taxes. Hiring a tax attorney to ensure that you file in the required states is advised.
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