Mid-Year Tax Planning for Construction Contractors – Are Your Tax Benefits Expiring?

Is your construction company prepared for the tax law changes approaching in the near future? This article will take a close look at four popular provisions created by recent legislation that could have an impact on your business. It is our hope that this insight will allow you ample time to plan and make well-informed tax decisions.

Meals and Entertainment

For tax years 2021 and 2022, the Consolidated Appropriations Act of 2020 allowed for meal expenses to be 100 percent deductible given that the meals are purchased from a restaurant while the taxpayer is present and that they are not lavish or extravagant. Expenditures for both client meals and employee meals are included.

Starting in 2023, these meals will revert to the original 50 percent deductibility. Entertainment will remain 100 percent nondeductible in 2023, which is consistent with the current tax law.

If your company attends an event where there are both entertainment and meal costs incurred, such as a baseball game, these costs should be specifically identified at the invoice level to determine the specific component of cost attributable to entertainment and meals. Vendor invoices with lump-sum totals for meals and entertainment will be 100 percent disallowed.

Per IRS guidance, remember to always retain receipts for company records. Please refer to our previous article, Mobile Workforce for Contractors Series: Part One – Meals and Entertainment, for a refresher on the requirements of meeting the 100 percent deduction.

Interest Deduction Limitation

Section 163(j) business interest limitation was enacted for tax years beginning in 2018 as a part of the Tax Cuts and Jobs Act (TCJA). It imposed a 30 percent limitation on the deductibility of business interest expense. In response to the uncertainties surrounding the COVID-19 epidemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) changed the calculation of the interest expense limitation to 50 percent of adjusted taxable income (ATI).

For tax years 2021 and forward, the interest expense limitation is back to 30 percent of ATI. Effective for tax year 2022, the calculation of ATI changes to a less favorable methodology. Pre-2022, ATI was computed by starting with taxable income and adding back interest expense, depreciation and amortization, and depletion. The resulting adjusted taxable income was then subject to a limitation percentage for allowable interest expense. Depreciation, amortization, and depletion will no longer be included in the ATI calculation in 2022 forward. These changes could result in a less favorable outcome, even if the limitation did not apply in years prior.

Phase-Out of Bonus Depreciation

The TCJA increased the bonus depreciation deduction from 50 percent to 100 percent. This change provided a major benefit to construction companies by providing immediate tax deductions. One hundred percent bonus depreciation is available for certain asset classes placed in service between September 27, 2017 and January 1, 2023. Starting in 2023, bonus depreciation percentages will begin to phase out.

If your construction company places new assets into service after January 1, 2023, but before the following dates, bonus depreciation on eligible asset classes will be available as follows:

  • December 31, 2023 – 80 percent Bonus Depreciation
  • December 31, 2024 – 60 percent Bonus Depreciation
  • December 31, 2025 – 40 percent Bonus Depreciation
  • December 31, 2026 – 20 percent Bonus Depreciation

Under the current law, any additions placed into service after January 1, 2027 will not be eligible for bonus depreciation. This phase-out may encourage construction companies to take advantage of bonus depreciation and accelerate potential capital expenditures before the end of the year.

Work Opportunity Tax Credit

Available through December 31, 2025, the Work Opportunity Tax Credit (WOTC) is a general business credit that could reduce the income tax liability on your next tax return. The credit is available when an employer hires qualified veterans and individuals from other target groups that face barriers to employment, and it can be as high as $9,600 per employee during their first year of employment. Please refer to this article for a more thorough explanation of the targeted groups.

Each target group has different maximum allowable wages for the credit calculation. No limit applies to the number of individuals that can qualify, which could be a great opportunity to lower your tax bill.  Please note, there are very specific documentation requirements in the beginning of the hiring process. Failure to satisfy these requirements could eliminate the ability to claim this credit.

In summary, while the tax law changes outlined above are not an inclusive list, these are a few key takeaways we believe are most relevant and could have an impact on the construction industry in the near future. Being able to plan for these expiring provisions allows for greater utilization of the tax deductions and credits before they are no longer available and ultimately puts more money in your company’s pocket.

If you have any questions, please contact your Kreischer Miller relationship professional or any member of our Construction Industry Group.

Authors:

Rachel DeFrain, Senior Accountant, Tax Strategies
Tiffany Eichhorn, Senior Accountant, Tax Strategies

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Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.

If your business is seeking accounting expertise and advice, please consider Kreischer Miller and contact us to have a conversation.