The economic changes over the past 12 months have been especially challenging for the construction industry. The increased cost of materials, equipment rental, insurance costs, and labor shortage have made 2022 a challenging year. Looking ahead, it is likely there will be similar issues leading to a potential slowdown in 2023. Despite this, there are year-end planning considerations which businesses can take immediately to reduce federal income tax liability. This includes taking advantage of 100% bonus depreciation, retroactively reinstated fuel tax credits, and even opportunities through the Employee Retention Tax Credit. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
Tax Opportunities Before Year End
100 Percent Bonus Depreciation
Contractors should consider whether it makes sense to take advantage of 100 percent bonus depreciation. This savings tool allows a business to immediately deduct a large portion of the purchase price of an eligible asset. Through this process, immediate short term tax savings are generated. Unfortunately, starting in 2023 the amount of bonus depreciation will decline until it is phased out completely after 2026. This means the maximum savings amount will only be available for a few more weeks. Therefore, if there are asset purchases under consideration now may be the time to move ahead.
Bonus depreciation can also be used with the 179D tax deduction, discussed below. Typically, 179D is applied first, then bonus depreciation. Since bonus depreciation applies to new or used equipment, it can amplify the value of these tax incentives when combined, especially while it’s still at 100 percent. Contractors can also use bonus depreciation for software purchases, which can spur the firm’s use of construction technology, too
Reinstated Fuel Tax Credits
Fuel tax credits offset federal tax liability for various fuels that contractors might use in machinery and trucks. Credit amounts are based off gallons used.
The Inflation Reduction Act retroactively reinstated three fuel tax credits for 2022, including:
- Alternative fuel credit
- Alternative fuel mixture credit
- Second generation biofuel producer credit
These credits are also extended through the 2024 tax year. Construction contractors can retroactively claim the fuel tax credits for earlier quarters in 2022. After this year though, liquified hydrogen no longer qualifies for the alternative fuel credit. Other credits for biodiesel, renewable diesel, and biodiesel and renewable diesel mixture have also been extended.
Other Tax Incentives
- R&D Tax Credit – There are other expiring tax provisions that may impact contractors’ year-end planning, such as changes to the amortization of research and development expenses and the more limited annual interest expense deduction, known as Sec. 163(j).
- Employee Retention Credit – Certain contractors may qualify to claim the employee retention credit. Though it expired for most companies after the end of the third quarter in 2021, eligible businesses can still file modified quarterly payroll filings and uncover additional tax savings.
- Meal & Entertainment Deduction – The temporary 100 percent business meal and entertainment deduction also expires at the end of 2022. It reverts to 50 percent on January 1, 2023.
- Staff Bonuses – Giving bonuses is another way to lower taxable income. Deductible business expenses, like salaries, rent and utilities, supplies, certain professional fees and subscriptions, and much more can all help to reduce taxable income. And when it comes to bonuses, construction employees are looking at higher amounts than last year, according to Construction Dive.
Real Estate Qualification Can Save on Taxes, Too
Construction contractors can also qualify as real estate professionals, openings the door to additional federal tax savings. If a business qualifies for the year, then additional expenses can be deducted.
Qualifying as a real estate professional may not need to involve extra certifications or designations. If contractors can substantiate that more than half of personal services performed throughout the year were in real property trades or businesses, they can meet the IRS definition of Passive Activity and At-Risk Rules. They must also exceed 750 hours of material participation throughout the tax year.
If there is more than one professional in a construction partnership, each person must qualify individually. Closely held corporations can also qualify if more than 50 percent of gross receipts were from real property trades or businesses.
To qualify as a real property trade or business, the contractor must be materially involved (re)developing, (re)constructing, renting or leasing, converting, acquiring, operating or managing, or brokering. Material participation is regular, ongoing, and consistently direct involvement.
There are other rules and considerations. Contractors should talk with their advisor at JLK Rosenberger if they think they qualify for tax savings as a real estate professional.
New Tax Incentives in 2023
Though not necessarily on the year-end planning agenda, there are a few const incentives to look forward to starting next year thanks to the Inflation Reduction Act.
The 45L energy efficient tax credit was reinstated for 2022 under existing rules. It’s extended through 2032 with the opportunity for additional savings if certain conditions are met. There will be more stringent energy saving requirements, and for multi-family dwellings, prevailing wage and apprenticeship thresholds. Next year, buildings more than three stories tall can qualify for 45L – a new development that could also expand how contractors can use the credit.
Also starting in 2023, the 179D energy efficient commercial building deduction has been expanded to include building retrofits. To qualify, the building must have been in service for at least five years, located in the U.S., and achieve at least a 25 percent reduction in energy use. Retrofits to the building’s HVAC, interior lighting, hot water systems, or building envelope qualify.
The regular 179D deduction is expanded if prevailing wage and apprenticeship requirements are met. And in 2023, contractors will be eligible for reallocated 179 tax deductions for relevant work on government-owned buildings.
We’re Here to Help
As the year end quickly approaches there is still time to take advantage of these, and others, tax planning strategies. Consult with a qualified tax advisor to determine the right steps for your business. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information please call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.