As year-end approaches, contractors should ask the following questions to better their tax situation. While there are many tax strategies available depending on a taxpayer’s individual circumstances, following are several common planning areas where tax advantages may be gained by contractors:
Did your company purchase any personal property in 2014?
Personal property that is placed in service by the end of the year may be eligible for immediate expensing by taxpayers. This includes such items as construction equipment, office equipment and some vehicles. Current law allows taxpayers to deduct up to $25,000 of qualifying personal property in 2014, provided the total of all qualifying property purchased does not exceed $200,000. This is a significant decrease in the deduction amount from prior years. However, both the House and Senate have passed tax extenders which increase the amount to $500,000 for 2014 (as long as qualifying property purchased does not exceed $2,000,000). Additionally, this legislation includes an extension of bonus depreciation, which allows 50% of the basis of property that is first placed in service during 2014 to be deducted. This legislation is expected to be signed by the President. It is important to note that eligible property does not have to be paid for in 2014 to be eligible for the immediate deduction – it only has to be placed in service. The property may be financed and the taxpayer will still receive the immediate benefit of the deduction.
Have you closed any 2014 contracts?
If a contractor accounts for its long-term contracts under the “completed contract” method, determine if contracts where a loss is expected can be “closed” by the end of the year in order to recognize this loss for tax purposes. The IRS considers a contract to be completed for tax purposes when 95% of the total costs have been incurred and the constructed property is being used by the customer for its intended purpose.
Do you have any contracts less than 10% completed?
If a contractor accounts for its long-term contracts under the “percentage of completion” method, gross profit on contracts that are less than 10% complete on a cost to cost basis as of the taxpayer’s year end can be deferred to the subsequent year.
Did you abandon or render any equipment obsolete in 2014?
You may write-off obsolete or abandoned equipment that is on the depreciation schedule before December 31, 2014. This may provide property tax savings.
Should you pay bonuses to your stockholders in 2014?
In order to be deducted in 2014, bonuses to some stockholders must be paid by December 31, 2014, depending on your type of entity and ownership percentage.
Have you considered tax elections or method changes appropriate for 2014?
New Tangible Personal Property Regulations became effective for tax years beginning January 1, 2014. Tax accounting method changes and their corresponding effect on taxable income should be considered along with annual tax elections that may need to be made.
Have you analyzed your percentage of completion on contracts in progress?
Contractors utilizing the percentage of completion method should closely evaluate estimated gross profits at completion on contracts in progress so as to not overstate taxable income on these contracts.
Do you have any prepaid expenses that you could deduct?
Contractors in need of additional deductions for 2014 may be able to prepay certain expenses. Generally, expenses are not deductible until the year in which they apply. However there is a 12-month rule exception that allows some costs to be deducted even though they are actually for a future period.
Understanding the unique needs of contractors, Elliott Davis professionals can help you plan for your tax responsibilities. Contact Jim Hazel at firstname.lastname@example.org or Travis Bogan at email@example.com if you have questions.