Tips for Filing Taxes in the Construction Industry
By Anita Mahamed, Partner, CPA and CFP at Wipfli
Filing your taxes correctly and on time is an important part of owning a business. However, many contractors and construction business owners may be left wondering where to start. If you’re struggling with how to do taxes as a contractor, keep these tips in mind.
1. Work With the Right Accountant
Different industries and types of businesses have different tax rules. Make sure the certified public accountant (CPA) that you work with understands the construction industry and the special tax rules that apply to contractors with long-term contracts. In many cases, there are ways to defer a portion of income each year if your CPA knows what to look for.
2. Avoid Common Mistakes
The terminology you encounter when working on your taxes can be confusing and unclear. However, knowing what mistakes to look out for can help you avoid making them. Here are a few common mistakes:
- Writing off all your startup expenses at once: If your company is new, you might be tempted to write off all your startup costs, but the IRS allows you to deduct only $5,000 in the first year. The rest is then written off over several years.
- Not keeping good records: If you don’t have proof of your expenses, you won’t have proof of the deductions you qualify for. This includes receipts for purchases. If you’re taking a mileage deduction on vehicles, you should have an adequate mileage log to substantiate the write-off.
- Bending the deduction rules: Take time to understand all the deduction rules. For example, if your business operates too many passenger vehicles in its fleet, you can’t use the standard mileage rate and would instead need to write off actual expenses.
- Not seeking help: Filing your business’s taxes can be complicated, particularly in the past year as new tax laws and clarifications have come out frequently. Hire a CPA to handle the nuances rather than submitting incorrect taxes.
3. Understand How the CARES Act Affects Your Taxes
In 2020, the government created various measures to help businesses cope with the challenges of the COVID-19 pandemic. If you took advantage of any of the CARES Act provisions, it’s important to understand how they’ll affect your taxes.
- Paycheck Protection Program (PPP): For federal tax purposes, PPP is not taxable. However, it may be taxable at a state level. Some states follow federal tax rules while others adopt their own, so it will depend on the state in which your business is located. When filing your taxes, have the supporting documentation you used for your forgiveness calculation at the ready.
- Economic Injury Disaster Loans (EIDL): Emergency EIDL advances are not included in income. You may deduct business expenses paid with an EIDL on your tax return as long as they are eligible for deduction in the first place.
- Employee Retention Credit (ERC): When ERC first became law, most business owners ignored it because they couldn’t take both PPP loans and ERC. However, a more recent law allows businesses to take ERC and PPP loans, as long as they aren’t using the same wages to qualify for ERC and PPP loan forgiveness. Careful planning with your CPA is key.
- For 2020, the credit is up to $5,000 per employee if, in general, a business either experienced a 50% or more drop in revenue per quarter compared to the same quarter in 2019 or the business was subject to a government shutdown.
- ERC allowed business owners to claim a payroll tax credit on quarterly employment tax return (Form 941). 2020 credits can still be claimed by filing an amended 2020 payroll tax form. If you claimed this credit for 2020, it would impact your 2020 tax return because the ERC can reduce expenses that you may otherwise deduct on your federal income tax return. Keep an eye on this credit in 2021, too; the rules to qualify are more liberal, and the potential maximum credit is higher.
- Payroll Tax Postponement (PTP): The PTP allowed employers to defer payment of their portion of Social Security. Like the ERC, these deferred payroll taxes are handled on the employment tax return, not the income tax return. Self-employed taxpayers will calculate the maximum deferral amount for net earnings from self-employment on Part III of Schedule SE, which will ultimately be reported on Schedule 3 and Form 1040.
4. Prepare for Your Tax Appointment
Whether you’re hiring a CPA or have a bookkeeper on your team, make sure you have all the documents needed to make filing taxes easier. Have your books in order before the appointment with your CPA to ensure the meeting is productive. Bring documentation of your use of any PPP funding, and review potential ERC eligibility before filing your 2020 tax return to avoid amended tax returns.
Filing your taxes can be complicated, but there are steps you can take to make it an easier process. Follow these tips and don’t hesitate to reach out to a qualified CPA for assistance. For more tips on successfully running your business, including creating a succession plan, visit the ABC Supply blog.
About Anita Mahamed:
With over 20 years of experience, Anita Mahamed understands tax laws, and her clients rely on her to apply them to their situation and to their advantage. As leader of Wipfli’s Madison, Wisconsin, construction and real estate practice, she provides a spectrum of tax-related services to businesses ranging from large, multinational corporations to small, closely held companies. Anita’s expertise also includes high-net-worth individuals. Learn more at wipfli.com.
This information is provided for educational and informational purposes only and is not intended as a substitute for obtaining accounting, tax, legal, or financial advice for a professional accountant or lawyer. Any opinions expressed are those of the author. ABC Supply makes no warranties regarding, and disclaims all responsibility for, the accuracy, legality, or content of this information. Any questions regarding the information provided should be addressed to the author.