Dispatch #56 - End of Year Tax Planning Playbook for Contractors
To say the least, 2020 has been a very “dynamic” tax year for contractors!
We opened the year at the crest of a construction boom, shut down during the pandemic, benefited from an unprecedented government stimulus program but didn’t get the next round as hoped, are in the midst of a presidential election, and are still leveraging a relatively new (2017) tax law environment.
If you take away one thing from this bulletin, this is it: meet with your CPA.
Beyond that, since you're out there selling, keeping projects on track, honing market strategy, and leading your team, you can't know or take all the steps below.
But your financial team can. Is your CPA customizing a solution for your firm? Is your Controller and/or CFO tax-engaged in the process?
Schedule a tax planning meeting and ask your Controller or CFO to kick things off with the first five steps below. The rest of this post provides additional guidance for once the tax planning process is underway.
Tax planning for contractors, a playbook
Send your CPA current financial statements and your forecast for this year’s profit
Detail your company’s engagement with COVID-19 government programs, such as the PPP and EIDL loan programs and expected FFCRA or employee retention credits
Guesstimate next year’s financial performance based on backlog and pipeline activity
Ask what you can do to minimize this year’s taxes
Ask how much you will owe in January and April (for 2020 plus 2021 Q1 estimate).
Ideally, you’re working with a construction-savvy CPA, familiar with industry-specific tax planning opportunities like these:
Accelerated depreciation on equipment and vehicle acquisitions
R&D tax credits
Revenue (and job loss) recognition choices to defer profit
Work in Progress (WIP) schedule and its tax implications
Captive insurance programs
If applicable, balance income among your construction firm(s), real estate venture(s), and personal tax returns, i.e., manage the whole.
Relevant to any industry are these timeless tax planning strategies:
Max out your 401K (or SIMPLE IRA) plan
Set 401K discretionary profit-sharing plan level to optimize cash flow, owner’s benefit, and employee recognition/retention impact (some companies are tilting toward cash bonuses instead to aid employees who earned reduced wages due to the pandemic)
Fold your CPA’s tax planning numbers into your 13-month cash flow forecast
Confirm entity type (C vs. S Corp) in general, and particularly if you intend to exit the business within the next five years
Set expectations for your CPA and Controller, and be an A+ client to your CPA to achieve your tax goals:
Minimize taxes
File corporate and personal returns on time
CPA-prepared financial statements on time for bank/bonding needs
Avoid cash flow surprises (no large amounts due, no large unexpected refunds)
Little or no underpayment penalties
Reduce audit risk and have proper documentation in case of an audit
Avoid last-minute deadline panic and financial system disruption.
Finally, don’t spend money only to save on taxes. Doing so means you actually end up with less money in your pocket. Spend money on things that move the business forward, and maximize the tax deductions from the same.
Remember, taxes are a good problem to have because it means you’re making money. The owners of best-in-class profitable construction companies pay taxes, so don’t feel like you’re “missing out” by paying taxes. That said, absolutely use the guidelines above to keep down the taxes you pay so that the money you save is yours to enjoy, save, invest, or give away.
Need help with this or other financial matters faced by construction contractors? Let’s talk!
David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.