Tax time is always a little painful for business owners—even more so when you end up saddled with a large tax bill. Fortunately, maximizing your tax deductions is one of the best ways that you can reduce your tax burden and save some cash (not to mention some stress).
Tax deductions are expenses that you can remove from your taxable income. Doing so lowers your income which, in turn, lowers the amount of taxes you owe. Less income means less taxes.
But while tax deductions (often called tax write-offs) sound simple in theory, they can be a little tougher to manage in practice—particularly when you’re juggling all of the other demands of entrepreneurship. Let’s take a look at what construction business owners need to know to make the most of their tax deductions.
Maximizing your construction tax deductions (and minimizing your tax bill)
In order to maximize your tax deductions, you first need to understand what counts as a legitimate deduction. When most people think of tax deductions, straightforward business expenses are the first thing to come to mind.
Your hard hat, steel toe boots, and high-visibility vest? Those are deductible expenses. Your tools and equipment? Those count too.
The IRS explains that, in order to be deductible, a business expense needs to be both:
- Ordinary: An expense that’s common and accepted in your industry
- Necessary: An expense that’s helpful and appropriate for your trade or business
If an expense checks both of those boxes, then you can likely write it off—meaning, subtract its cost from your taxable income. But keep in mind that the IRS isn’t inclined to take your word for it. For any deductible expenses, make sure to:
- Keep accurate records of your expenses, including who you paid, when you paid, what you purchased, and how much it cost.
- Ask for receipts and then file them so you can easily reference them again if needed.
While your tools, gear, and even your phone bill seem like fairly intuitive write-offs, there are a few other tax deductions that construction business owners often overlook. Here are a few to keep in mind to potentially lower your own tax bill.
1. Depreciation costs
Construction can require some big equipment and specialized tools—many of which come with a hefty price tag. Yet those same purchases are also prone to depreciation, meaning their value decreases over time.
The IRS actually allows you to write off that depreciation on your taxes, provided that you’re the owner of the item and it has a “useful life” of more than one year (essentially meaning you’ll use it for longer than a year).
There are generally three methods to calculate how much depreciation you can write off:
- Straight-line method: Depreciate the item an equal amount each year of its useful life
- Accelerated method: Take larger depreciation deductions in the first few years, but smaller deductions in future years
- Section 179 deduction: Deduct the entire cost of the asset in the year it’s purchased
Regardless of which method you choose, deducting depreciation can help you offset the large cost of some of your equipment, vehicles, or other property.
2. Loan interest payments
Because running a construction business can require some substantial investments, you might take out a business loan. Provided the funds are being used specifically for your business, you can write off the interest portion of your loan payments as a tax-deductible business expense.
In order to deduct the interest you paid on a business loan, the IRS says you need to meet the following criteria:
- You must be legally liable for that debt
- You and the lender intend that the debt be repaid
- You and the lender have a true debtor-creditor relationship
Most business loans check those boxes, so you’re likely eligible to deduct your interest payments.
3. Continuing education
There’s always something new to learn in the construction industry. If you purchase something to further your own knowledge and development—whether it’s a course, a ticket to attend a conference, books, or any other educational materials—you can write it off on your taxes.
Again, the IRS has a few rules. Your tax-deductible educational expenses must:
- Maintain or improve skills needed in your present work
OR
- Be required in order to keep your present salary, status, or job
However, your education expenses can’t be in the interest of qualifying for a new role, trade, or business—they need to serve your existing business and career.
4. Subcontracted labor
Subcontracting is most common in construction, where projects are complex and often require different skills or trades. The payments that you make to any subcontractors—whether it’s someone who did your website or an electrician you used for a construction project—are tax-deductible business expenses.
In order to deduct these labor costs, you need to issue a 1099-MISC to any subcontractors you paid more than $600 to throughout the year.
Additionally, confirm that your subcontractors are indeed independent contractors and not actually misclassified employees. Misclassification of workers is especially prevalent in construction, and it can come with hefty fines and penalties.
Save more money with tax credits
When it comes to reducing your tax burden, you might also hear about tax credits. They’re similar to tax deductions in that they lower your tax bill, but they do so in different ways:
- Tax deductions: Subtracted from your taxable income
- Tax credits: Subtracted from your actual tax bill
So, if your tax return says you owe $500 but you have a $600 tax credit, then you’re actually owed a refund of $100.
There are quite a few that might apply to your construction business, including:
- Research and development tax credit: Whether you’re developing a new process or building a prototype, you can get a tax credit for those types of research activities.
- Work opportunity tax credit: If you hire people from certain groups who have faced barriers to employment, you can get a federal tax credit.
- Paid family medical leave tax credit: Did you provide paid family and medical leave to your employees? You can claim the credit, in the amount of a percentage of wages you paid to qualifying employees while they were on leave.
These are things that you might already be doing in your business anyway—you simply need to report them appropriately to reap the benefit of a tax credit.
Reduce your tax burden (and your stress)
Nothing adds to the misery of tax time like realizing you need to pay in a hefty sum. That’s why it’s wise to connect with a qualified accountant and stay on top of your tax deductions. They can help you reduce your overall tax obligation (and maybe even get a refund).
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Kat Boogaard
Kat Boogaard is a Wisconsin-based freelance writer focused on business ownership, leadership, and the world of work. When she escapes her computer, you’ll find her spending time with her two boys and her two old, crabby rescue mutts.