Tax Services for Construction Businesses

Year-end is a good time to explore strategies to unlock potential tax-saving opportunities. This is especially true in 2024 when high interest rates and the upcoming expiration of certain tax benefits make some strategies particularly beneficial.

Learn what tax strategies businesses should consider before year-end 2024, including changing your accounting method, the timing of fixed asset purchases, and business succession planning.

Weigh accounting method changes considering high-interest rates
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There are pros and cons to changing accounting methods, which can sometimes help your organization save money. When the cost of capital was low, there were fewer benefits, but now that interest rates have risen significantly, considering a new method may be worth revisiting.

Another consideration to factor in is the upcoming tax rate and deduction changes. The lower individual tax rates from the Tax Cuts and Jobs Act and the Section 199A deduction are scheduled to sunset on December 31, 2025. Barring congressional action, the top tax rates on pass-through income from a non-specified service business will increase from 29.6% to 39.6%. Depending on your cost of capital, a deduction against 39.6% income in 2026 may be more valuable than a deduction in 2024 against 29.6% income. Businesses with a relatively low cost of capital anticipating future tax rate increases may prefer a wait-and-see approach.

Explore some of the following standard accounting method changes worth considering before year-end:

Overall cash method of accounting

Tax reform expanded the availability of the cash method of accounting, yet some eligible businesses have remained on the accrual method. The cash method of accounting generally defers recognition of income relative to the accrual method because most taxpayers have more receivables than payables.

Advance payments for goods
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Accrual-method taxpayers can either account for certain advance payments and include them in taxable income in the year received (the full-inclusion method) or include the payments in taxable income in the year of receipt to the extent included in revenue for financial statement purposes and include the remaining amount in income in the next tax year (the deferral method). The deferral method requires businesses to determine the portion of deferred revenue earned in the year after receipt, so the administrative burden should be considered.

Prepaid expenses
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Accrual-method taxpayers can generally deduct certain prepaid expenses, such as insurance, taxes, and warranty or maintenance service contracts if the term covered by the prepayment does not extend beyond the earlier of 12 months after the first date on which the taxpayer realizes the right or the end of the tax year following the year of payment.

Fixed asset methods
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Taxpayers who own real estate may be able to accelerate deductions by performing a cost-segregation analysis to determine the appropriate tax life of various real estate assets or a repair analysis to identify costs that can be expensed rather than capitalized. Likewise, they may be able to accelerate deductions related to an energy-efficient building by performing a Section 179D analysis.

Inventory methods
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There are generally two acceptable inventory valuation methods: cost or lower-of-cost-or-market. The lower-of-cost-or-market inventory method takes more time but may reduce the value of the taxpayer’s inventory and thus accelerate deductions.

A business may be able to deduct obsolete or damaged inventory if it can no longer sell the inventory in a usual manner or at its normal price. The deduction for obsolete inventory is available only if the inventory is disposed of or the taxpayer establishes the reduction in value by offering the inventory for sale to the public at a reduced price within 30 days after the inventory date. Taxpayers may want to evaluate their inventory for potential valuation-related adjustments.

The uniform capitalization rules are complex; however, taxpayers can accelerate tax deductions by analyzing their capitalization methodologies. As just one example, many taxpayers have not fully explored the tax benefits of the new modified simplified production method uniform capitalization (UNICAP) calculation included as an option in final regulations issued in November 2018.

Retirement Plan Selection
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Many businesses use the same retirement plan year after year, such as a SEP IRA or 401(k) plan. Your business may have outgrown its existing plan, or your tax objectives may have changed. Consider whether another retirement plan is a better option (e.g., 401(k), profit sharing, SIMPLE IRA, SEP IRA, ESOP, cash balance plan, non-qualified deferred compensation, personal traditional or Roth IRA).

Timing of fixed asset purchases
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Bonus depreciation for equipment and other assets is set to drop to 40% in 2025 from its current 60%. If you use immediate expensing under Section 179 and not bonus depreciation, this isn’t a major concern, but it’s something to be aware of for the future.

For 2024, the Section 179 limit is $1.22 million, with a phaseout beginning when purchases exceed $3.05 million. The additional bonus depreciation in 2024 provides an extra incentive for taxpayers subject to a Section 179 limit to place assets in service before year-end. Anticipated tax rates in 2024 and future years should be considered as well.

Business and wealth succession planning

Year-end is a key time for future planning. For business owners, that may mean looking at what’s next for your business. There are significant tax consequences associated with selling or transitioning a business.

If you’re considering a business transition in the next few years, be aware that the lifetime gift tax exemption will be cut in half starting in 2026 (from $12.92 million per person in 2023 to $6.46 million in 2026, adjusted for inflation). Gifts made prior to 2026 will be eligible for the higher exemption — even if the law subsequently changes — so there may be an incentive for taxpayers to make gifts before the rules change. Though tax rules are hard to predict — Congress has extended the enhanced exemption in the past and may do so again.

Considering the current high-interest rates, there are some wealth transfer strategies worth considering. Here’s an example:
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• A qualified personal residence trust (QPRT) is a trust that holds the taxpayer’s principal residence.
The taxpayer retains the right to use the residence for a fixed period, after which the residence transfers to the trust’s beneficiaries.
• The taxpayer can continue to live in the property after the trust ends but must pay a fair market value rent to the beneficiaries.
• The trust reduces the taxable amount of the gift in two ways: the value is discounted for the grantor’s retained interest, and the value of the gift is frozen based on the value of the property at the time the QPRT is established.
• Higher interest rates increase the discount for the grantor’s retained interest, thereby reducing the amount of the taxable gift.
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How We Can Help
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These are just a few of the tax strategies that could help your business situation. At CTC, we believe proactive, personalized planning is vital to helping you navigate tax liabilities and identify new opportunities for savings. Contact us to explore whether these suggestions could help your business.

• Max out pre-tax retirement savings. The deadline to contribute to a 401(k) plan to get a 2024 taxable income reduction is December 31st. So, if your employer’s plan allows it, consider making a last-minute lump sum contribution. For 2024, you can contribute up to $23,000 to a 401(k), plus another $7,500 if you’re age 50 or older. Even better, you have until April 15, 2025, to contribute up to $7,000 into a traditional IRA. And if your income does not exceed phaseout limits, you can reduce your taxable income on your 2024 tax return.
• Convert to a Roth IRA. Consider converting some or all of your traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA. Although you pay income tax on the amount of the Roth conversion the year it is made, subsequent growth is tax-free in a Roth IRA, and withdrawals from the account are 100% tax-free after five years from the date of the conversion.
• Tax loss harvesting. If you own stock outside a tax-deferred retirement plan, you can sell your under-performing stocks by December 31st and use these losses to reduce any taxable capital gains. If your net capital losses exceed your gains, you can net up to $3,000 against other income, such as wages. Losses over $3,000 can be used in future years.
• Selling appreciated assets. Consider selling appreciated assets in the tax year that helps you the most. While this strategy may be complicated to accomplish this late in the year, it is still worth consideration. To do this, estimate your current year’s taxable income and compare it to next year’s projected income. Then sell the appreciated asset in the year that will yield the lowest tax. Remember to account for the 3.8% net investment income tax in your estimates.
• Review health spending accounts. If you participate in a Health Savings Account (HSA), maximize your annual contribution to reduce your taxable income. Remember, these funds allow you to pay for qualified health expenses with pre-tax dollars. More importantly, unlike Flexible Spending Accounts (FSA), you can carry over all unused funds into future years. If you do have an FSA, you can carry forward a maximum of $640 from 2024 into 2025 if your plan allows this. The deadline for contributing to your Health Savings Account (HSA) and still getting a deduction for the 2024 tax year is April 15, 2025. The maximum contribution for 2024 is $4,150 if single and $8,300 for married couples. If you’re age 55 or older, you can add $1,000 to your HSA contribution.

While the year is quickly coming to an end, there is still time to reduce your 2024 tax liability, but only if you act now.

The deadline for individual tax returns (Forms 1040 and 1040SR) is April 15, 2025. You may request a six-month extension and extend the filing deadline to October 15, 2025. Extensions apply only to filing deadlines. Amounts owed to the IRS are due no later than April 15, 2025, despite the extension.

Trust and Estate income tax return (Form 1041) is due April 15, 2025. However, trusts and estates can request a five-and-a-half-month filing extension. The extended deadline is September 30, 2025.

S Corporation (Form 1120S) has an initial filing deadline of March 17, 2025. The corporation may request to extend the deadline to September 15, 2025. S Corporations with a fiscal year-end other than a calendar year must file by the 15th day of the third month following the end of the corporation’s fiscal year and are permitted to extend for another six months.

Partnership return (Form 1065) is due March 17, 2025. However, you may request a six-month extension and extend the filing deadline to September 15, 2025.

The calendar year C Corporation (Form 1120) tax return is due April 15, 2025. The corporation may request a six-month extension and extend the filing deadline to October 15, 2025. As noted for the individual extensions, tax payments cannot be extended and must be paid no later than April 15, 2025.

C Corporations with a fiscal year-end other than a calendar year must file by the 15th day of the fourth month following the end of the corporation’s fiscal year. A six-month extension may be requested. ***

‍See our tax calendar for a more comprehensive list of 2024 income tax return deadlines.

** Some states and counties may be affected as a federally declared disaster and are permitted an extended deadline. Contact your Cooper, Travis & Company, PLC advisor for more details.

*** C Corporations with a fiscal tax year ending on June 30 and beginning before January 1, 2026, must file its tax return on or before September 15 and may extend seven months until April 15.

Generally, tax records related to federal income taxes should be kept for three years from the date you filed your tax return. The IRS requirements for record keeping are listed below:

1. Keep records for three years if situations (4), (5), and (6) below do not apply to you.
2. Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later if you file a claim for credit or refund after you file your return.
3. Keep records for seven years if you file a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for six years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
5. Keep records indefinitely if you do not file a return.
6. Keep records indefinitely if you file a fraudulent return.
7. Keep employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later.

If the records relate to property (land, building, equipment, etc.), then you generally should keep those records until the period of limitations expires for the year you dispose of the property. Additional limitation rules apply to property you receive in a nontaxable exchange.

The IRS identifies two types of dependents, each subject to its own rules. The first is a qualifying child, and the second is a qualifying relative. See below for the general requirements and the rules for each dependent type.

General requirements for both qualifying child and qualifying relative:
‍TIN. Must include the dependent’s taxpayer identification number on the return of the taxpayer claiming the dependent. This is generally their social security number.
‍Citizenship / Residency. The dependent must be a citizen or national of the U.S. or a resident of the U.S., Canada, or Mexico for part of the year.
‍No Dependents. The dependent cannot claim any dependents on his return.
‍Married Dependent. A married individual who files a joint return with their spouse cannot be claimed as a dependent. Certain exceptions apply.

The following additional rules apply to each type of dependent:

Qualifying Child:

‍Are they related to you? The child must be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister (or descendant of such relatives). The relationship test also includes foster and adopted children if certain restrictions are met.

‍Do they meet the age requirement? Your child must be under age 19 at the end of the year or, if a full-time student, under age 24 at the end of the year. There is no age limit if your child is permanently and totally disabled.

‍Do they live with you? Your child must live with you for more than half the year, but several exceptions apply.

‍Do you financially support them? Your child may have a job, but that job cannot provide more than half of their support.

‍Joint Return? The child cannot file a joint return with their spouse except as a claim for a refund.

‍Are you the only person claiming them? This requirement commonly applies to children of divorced parents.Qualifying Relative:

‍Do they live with you? The individual must have the same principal place of abode as you and be a member of your household all year or be on the list of “relatives who do not live with you” in Publication 501. About 30 types of relatives are on this list.

‍Do they make less than $4,700? The individual cannot have a gross income of more than $4,700 for the tax year 2024 and be claimed by you as a dependent.

‍Do you financially support them? You must provide more than half of the individual’s total support for the year.

‍Are you the only person claiming them? This means you can’t claim the same person twice, once as a qualifying relative and again as a qualifying child. It also means you can’t claim a relative—say a cousin—if someone else, such as his parents, also claims him.

This is the fifth year under the Tax Cuts and Jobs Act (“TCJA”) – which made extensive changes to the tax code at the beginning of 2018. Due to some of those changes, many individual taxpayers found it more advantageous (and easier) to take the standard deduction than itemizing their deductions for the first time.

For 2024, the standard deduction increases to $29,200 for married filing jointly, $21,900 for head of household, and $14,600 for single taxpayers and married individuals filing separately.

A taxpayer who files married filing jointly, married filing separately, or surviving spouse age 65 or older, blind, or both at the end of the tax year may add $1,550 ($3,100 if both 65 or older and blind) to the basic standard deduction.

A taxpayer who files single, unmarried, or head of household and is age 65 or older, blind, or both at the end of the tax year may add $1,950 ($3,900 if both 65 or older and blind) to the standard deduction.

As a result, many taxpayers who previously reported itemized deductions can receive a higher deduction and save time gathering documents by taking the standard deduction.

In addition to increasing the standard deduction, the TCJA limited several itemized deductions. For example, under TCJA, taxpayers can only deduct up to $10,000 for state and local taxes ($5,000 if married filing separately). Previously, there were no limits.

The TCJA also reduced the amount of interest deductible on acquisition debt for a primary and secondary residence to interest paid on debt of up to $750,000 ($375,000 of debt for married filing separately taxpayers). Before TCJA, interest expense on debt of up to $1 million was deductible. The reduced limit only applies to acquisition debt for a primary or secondary residence incurred after December 15, 2017, and before January 1, 2026.

For some taxpayers, the decision to take the standard deduction is easy. However, for those taxpayers whose itemized deductions may exceed the standard deduction, providing your tax preparer with all the information will be beneficial. The decision will be based on which deduction offers the greatest benefit for you.

The annual contribution limit for 2024 is $7,000, or $8,000 if you’re 50 or older. Your Roth IRA contributions may also be limited based on your filing status and income.

Traditional IRA contributions may be deductible on your tax return. If neither you nor your spouse is covered by a retirement plan at work, your deduction is allowed in full. ROTH IRA contributions are not deductible.

Self-employment tax is a social security and medicare tax primarily for self-employed individuals. Self-employed individuals who earn over $400 during the year are subject to self-employment tax. For 2024, income up to $168,600 ($176,100 for 2025) is taxed at a rate of 15.3% (12.4% Social Security tax and 2.9% Medicare tax). For 2024, income over $168,600 ($176,100 for 2025) is taxed at the 2.9% Medicare tax rate. (A 0.9% additional Medicare tax may also apply. See the next question below.) One-half of your self-employment taxes are deductible from your adjusted gross income on your tax return.

Your self-employment tax payments contribute to your coverage under the Social Security system. Social Security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

You are liable for Additional Medicare Tax if your wages, compensation, or self-employment income (together with that of your spouse if filing a joint return) exceeds the threshold amount for your filing status. For those with a filing status of married filing jointly, the threshold amount is $250,000 (married filing separately is $125,000). The threshold is $200,000 for those filing as single, head-of-household, or qualifying widow(er) with a dependent child.

If total wages, compensation, or self-employment income paid to you (including your spouse’s income if filing a joint return) exceeds the applicable threshold amount, then you are subject to the Additional Medicare Tax on that excess. The Additional Medicare Tax rate is 0.9%.

For individual taxpayers, the net investment income tax is 3.8% on the lesser of:

• Your net investment income, or
• The excess of your modified adjusted gross income over the following threshold amounts:
- $250,000 for married filing jointly or qualifying widow(er)
- $125,000 for married filing separately
- $200,000 for those filing as single or head of household

Generally, investment income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading financial instruments or commodities and businesses that are passive activities to the taxpayer.

The Qualified Business Income Deduction (“QBID”; also known as Section 199A) was enacted with the Tax Cuts and Jobs Act of 2017 and created a deduction for qualified pass-through entities.

The QBID was a congressional attempt to mirror the reduced tax rate of 21% afforded C-Corporation under the TCJA to pass-through entities.The Qualified Business Income Deduction (QBID) is a 20% deduction for qualified business income. Certain income limitations apply and are discussed later.

The deduction is taken at the individual level. It is available for taxpayers with ownership in a pass-through entity such as a sole proprietorship, partnership, or S Corporation.

Partnerships and S Corporations will include the necessary information for the deduction on the taxpayer’s Schedule K-1. Your business must be a qualified trade or business to be eligible for the deduction.

Exceptions under the Act include specified service trades or businesses, which include any trade or business whose principal asset is the reputation or skill of one or more of its owners, such as accounting, law, investment management, financial services, athletics, trading, or dealing in certain assets. Under TCJA, these businesses do not qualify for the deduction if the taxpayer’s income exceeds the income limitations described below.

As mentioned above, the QBID is a 20% deduction on qualified business income. The 20% deduction is taken on the lesser of the qualified business income or the taxpayer’s taxable income.

Income limitations on the QBID apply to taxpayers whose taxable income is above certain thresholds. For 2024, the threshold amounts are:

$383,900 for married filing jointly;
$191,950 for all other returns

If the taxpayer’s taxable income is above the threshold amounts, the QBID is subject to limitations. Limitations include a reduction in the amount available for the 20% deduction based on W2 wages paid and qualified assets owned.

The QBID is complicated. For further questions on the QBI deduction, please consult one of our tax professionals.

Section 179 Deduction. The Section 179 deduction is an election to recover all or part of the cost of certain qualifying property (new or used, as long as the previously used equipment is new to you). You can elect the Section 179 deduction instead of recovering the cost by taking annual depreciation deductions.

In 2024, the maximum Section 179 deduction for property placed into service was $1,220,000. However, businesses exceeding $3,050,000 of purchases in qualifying equipment are subject to the Section 179 deduction dollar-for-dollar phase-out. Accordingly, the election is eliminated if qualifying purchases exceed $4,050,000.

In 2025, the maximum Section 179 deduction is $1,250,000. The dollar-for-dollar phase-out begins at $3,125,000, and the deduction is eliminated if total purchases exceed $4,050,000.

‍Bonus Depreciation. Bonus depreciation allows you to elect to expense up to 100% of the cost of certain vehicles and equipment purchased and placed into service in the 2021 tax year. TCJA increased bonus depreciation from 50% to 100% and eliminated the rule that the asset be new. Therefore, bonus depreciation can be taken on new or used purchases (as long as it is new to you and not purchased from a related party, along with other limitations) with a useful life of 20 years or less. The ability to expense 100% of asset purchases goes through December 31, 2022. After that, the deduction decreases to 80% for the 2023 tax year, 60% for 2024, 40% for 2025, and 20% thereafter.

In prior years, businesses could deduct 50% of business meals and entertainment costs on their tax return. However, the TCJA changed this deduction, eliminating the deduction for entertainment expenses, such as tickets to a sporting event, concert, or golf game with a client or customer.

General Rule: The cost of business meals is still deductible at 50%. The cost of entertainment that includes food and drink must have an invoice showing the amount related to food and drink to take the 50% deduction for that portion of the cost. Meals and entertainment expenses provided to the general public as a way of advertising are deductible in full as advertising costs.

The short answer is yes. The credits are taxable for federal income tax purposes. Under section 2301(e) of the CARES Act, the qualifying payroll and health plan expenses are reduced by the amount of the credit obtained.

The taxability of the ERC funding stands in contrast to the Paycheck Protection Act grant funding received by many businesses. It took a congressional act, but PPP was finally clarified as nontaxable for federal income tax purposes.

Under the Act, the age when minimum distributions (RMD) are required increased to 73 in 2023 and increases to 75 in 2033. Previously, RMD had to begin at 72.

Additionally, the penalty for failing to take an RMD decreased from 50% to 25% of the RMD amount in 2023. The penalty can further be reduced to 10% for IRA account distributions if the RMDs are corrected promptly.