Written by Luis Benitez, Founder & Owner
Luis Benitez is an experienced accounting professional with a diverse background in construction, restaurants, and retail. He founded LGB Strategic Solutions, an accounting/business strategy firm dedicated to helping business owners achieve long-term success.
Navigating tax obligations as a construction business owner can feel overwhelming. However, with the right strategies, you can significantly reduce your tax burden and keep more of your hard-earned money. This guide unravels seven powerful tax reduction techniques tailored specifically for construction businesses, helping you maximize deductions and leverage smart financial planning. Let’s uncover these strategies to strengthen your bottom line and set your business up for financial success.
1. Maximizing deductions through accurate job costing
Why accurate job costing is essential
Accurate job costing is one of the most critical tools for construction business owners to manage profitability and reduce taxes. This process involves tracking all expenses associated with specific projects, including labor, materials, equipment, and overhead. Overlooking expenses can lead to paying more taxes than necessary while obscuring which projects are profitable.
Identify deductible items
When job costs are meticulously tracked, you can easily identify deductible expenses such as subcontractor payments, materials, equipment rentals, and travel expenses directly tied to specific projects. These deductions help reduce your taxable income, ultimately lowering your overall tax burden.
Use construction-specific software
One of the most effective ways to ensure accuracy in job costing is to utilize construction-specific accounting software to track expenses in real time. These tools allow construction business owners to monitor costs, reducing the risk of errors, missed deductions, and financial discrepancies. Platforms like Procore and Intuit QuickBooks provide powerful solutions for managing job costs, categorizing expenses, and generating detailed financial reports.
2. Leveraging section 179 for equipment purchases
What is section 179?
Section 179 of the Internal Revenue Code provides an opportunity to offset these costs by allowing businesses to deduct the full purchase price of qualifying equipment and software during the tax year it was purchased rather than spreading the deduction over the years through depreciation.
Reduce costs through section 179
Investing in new equipment is often essential for construction businesses to remain competitive and operationally efficient. However, the high cost of machinery, vehicles, and tools can create financial strain and limit cash flow.
Plan purchases strategically
To maximize the benefits of Section 179, carefully evaluate your equipment needs and plan purchases strategically within the tax year. It’s important to ensure that the equipment qualifies under Section 179 guidelines, which typically include excavators, trucks, and even software solutions.
3. Depreciation methods for large assets to reduce taxable income
Why depreciation matters
Construction businesses often rely on large, high-cost assets like excavators, utility trucks, and buildings to stay competitive. These assets are vital to your operations but have a hefty price tag. By understanding and leveraging the proper depreciation methods, you can significantly lower your tax burden and free up capital for reinvestment.
Explore accelerated depreciation options
Not all equipment qualifies under Section 179, but other methods, such as the Modified Accelerated Cost Recovery System (MACRS), provide opportunities to front-load deductions. MACRS is particularly beneficial for construction businesses as it enables you to claim more significant deductions during the earlier years of an asset’s life when tax savings might be most impactful.
What about bonus depreciation?
Bonus depreciation is another powerful strategy to maximize tax savings. This method allows you to deduct a significant portion of the cost of eligible assets in the year they are placed into service. For example, if your company purchases a $200,000 excavator, depending on the asset's eligibility, you could potentially write off a large percentage of that cost in the first year.
4. Hire your children to reduce your income tax effectively
Leverage family employment for tax savings
Hiring family members like your spouse and children is a highly effective yet often underutilized strategy for reducing tax liabilities. This approach allows you to shift taxable income to individuals in lower tax brackets, minimizing payroll taxes in some instances while keeping more of your wealth within the family.
Tax advantages of hiring children
Employing your children under the age of 18 provides unique tax benefits. For sole proprietorships or partnerships between spouses, wages paid to children are exempt from Social Security, Medicare, and Federal Unemployment Taxes (FUTA). This means you can significantly reduce payroll tax obligations.
Implement the strategy effectively
To fully utilize this strategy and avoid IRS scrutiny, follow these best practices:
Assign legitimate roles: Ensure family members perform real and necessary tasks, such as bookkeeping, marketing, or job site clean-ups.
Pay fair wages: Compensation must align with the work performed and the local market rate. Paying excessive wages can raise red flags with the IRS.
Maintain documentation: Keep detailed records of employment agreements, hours worked, and job descriptions to substantiate the business relationship.
Follow payroll procedures: File all necessary tax forms, issue W-2s, and withhold applicable taxes where required.
Comply with child labor laws: Ensure your children’s work complies with state and federal labor laws, especially on job sites or when using hazardous equipment.
5. Setting up a construction-specific retirement plan
Retirement plans: A win-win for employers and employees
Planning for the future is critical, even in the demanding construction world. A construction-specific retirement plan provides significant tax advantages while helping you attract and retain skilled employees in a competitive labor market.
Explore retirement plan options
Several retirement plans are tailored to the construction industry, including:
Simplified Employee Pension (SEP) IRAs: Allow for high contribution limits and easy setup.
Savings Incentive Match Plan for Employees (SIMPLE) IRAs: Ideal for small businesses, offering employer-matching contributions.
401(k) Plans with Profit-Sharing Components: Enable you to reward employees based on company performance while benefiting from tax-deductible contributions.
Tax benefits for business owners
Contributions made by employers to retirement plans are tax-deductible, reducing taxable income and payroll taxes. Small businesses with fewer than 100 employees may also qualify for the Retirement Plans Startup Costs Credit, which offsets up to $5,000 annually for three years.
6. Managing retainage to prevent overpayment of taxable income
Understanding retainage challenges
Retainage, or the portion of a payment withheld until a project is completed, is a common practice in construction but can create significant financial and tax challenges. Retainage delays revenue recognition, leading to cash flow gaps and complicating tax planning, as the timing of revenue recognition impacts taxable income.
Use strategic accounting methods
Your accounting method plays a crucial role in managing retainage effectively. Two primary methods include:
Completed contract method: This method defers revenue and expenses until the project is finished, delaying tax liability for retainage until payment is received.
Percentage-of-completion method: Recognizes revenue and expenses as the project progresses, providing a more accurate picture of financial performance.
Match revenue and expenses
Correctly matching revenue and expenses ensures your financial records accurately reflect project profitability. This reduces the risk of surprises during tax season and helps you plan for future cash flow needs.
7. Structuring your business entity for tax efficiency
Why business entity structure matters
The legal structure of your construction business plays a pivotal role in determining your tax obligations, liability protection, and potential for future growth. Selecting the right structure can help you minimize taxes, protect your personal assets, and create opportunities to scale your business.
Common entity options
Construction business owners typically choose from the following entity types:
Sole Proprietorships: Simple to set up but offer no liability protection.
Partnerships: Suitable for businesses with multiple owners but may involve complex tax reporting.
Limited Liability Companies (LLCs): Provide liability protection with flexible tax options.
S Corporations (S Corps): Offer tax advantages by splitting income into salary and distributions.
C Corporations (C Corps): Best for larger businesses, but subject to double taxation.
Each structure has unique advantages and disadvantages that should be carefully weighed against your business size, goals, and revenue streams.
Benefits of LLCs and S corporations
For many small to mid-sized construction businesses, LLCs and S corporations provide an ideal balance of tax efficiency and liability protection.
Pass-through taxation: Both LLCs and S corporations allow profits to “pass-through” to the owners’ personal tax returns, avoiding the double taxation associated with C corporations.
Qualified business income (QBI) deduction: LLCs may qualify for a 20% deduction on qualified business income, which can significantly reduce taxable income.
Reduced self-employment taxes: S corporations allow you to classify part of your income as a salary and the remainder as distributions, lowering your self-employment tax liability.
For example, if your business generates $200,000 in profit, structuring as an S corporation might allow you to save thousands in taxes compared to operating as a sole proprietorship.
Are you ready to take control of your construction business finances and keep more of your hard-earned money? I am here to help you maximize your profits while lowering your tax liability. Contact me today to schedule your free tax analysis consultation and take the first step toward financial growth.
Read more from Luis Benitez
Luis Benitez, Founder & Owner
Luis Benitez is a dynamic leader known for his resilience, determination, and passion for business. Migrating to the U.S. as a child, he faced immense challenges, sacrificing a “normal” teenage life to work multiple jobs while attending school. At 18, he underwent brain surgery, forcing him to put his college dreams on hold. After navigating personal financial struggles, he seized the opportunity to complete his degree while gaining hands-on experience in construction accounting. Today, he is the Owner of LGB Strategic Solutions, an accounting and business strategy firm dedicated to transforming how businesses and individuals achieve financial growth—his mission is to foster growth through insight and innovation.
