Whether purchasing a new piece of equipment to replace an outdated one or hiring extra help to handle a new project, owners and managers of contracting firms tend to focus on “taking care of business” now and put off thinking about the tax consequences until later.
But doing so often comes at a cost. Here are four tax mistakes that contractors commonly make — some that can leave serious money on the table, or worse, land you in trouble with the tax authorities.
1. Failing to Depreciate New Equipment Correctly
Tax provision, Section 179, lets you deduct all or part of the cost of equipment purchased or financed and put into place before December 31, 2022. The only stipulation is that the equipment needs to qualify for the deduction. Here are some guidelines to help you claim this deduction at year-end.
2. Overlooking the Fuel Tax Credit
the Inflation Reduction Act, retroactively reinstated and extended the following fuel tax credits through December 31, 2024:
- Alternative fuel credit
- Alternative fuel mixture credit
- Second-generation biofuel producer credit
See Notice 2022-39 for information on how to make retroactive claims for the alternative fuel credit for the first, second, and third quarters of 2022, and the alternative fuel mixture credit for the first and second quarters of 2022.
3. Overlooking the Domestic Production Activity Deduction
The maximum credit you can claim under the domestic production activities tax deduction is 9% of the income you earn from the business. Since the intent of the deduction is to increase production and employment in the United States, your business can only qualify if it has employees.
Additionally, the deduction carries two significant limitations:
- You can only deduct up to half the amount you pay to your workers engaged in domestic production
- Your deduction cannot exceed your corporation’s taxable income
If you operate a sole proprietorship, S corporation, partnership, or LLC, the deduction is limited to your adjusted gross income. Here’s how to claim it.
4. Misclassifying Employees as Independent Contractors
Should the people working on your jobs be issued a W-2 or 1099? Unfortunately, the decision is not based on what the employer would like to save or what the employer believes the person may be. The decision must be made according to (among other things) who has “control” of the employee or independent contractor for the work that the worker is performing.
Although the up-front cost savings of issuing a 1099 rather than a W-2 are certainly tempting, the potential penalties in the long run — including increased scrutiny by federal and state tax authorities — are just not worth the risk. That’s why it pays to take the correct steps at the beginning of a worker’s engagement with your company to ensure that he or she is classified properly.