Key Points for Managing Your Liability
The fourth quarter of 2016 has arrived. Now is a good time to consider your construction company’s tax liability and take the necessary steps to minimize it.
Catch Up on Section 179
Section 179, which allows businesses to deduct, rather than depreciate, some equipment and software purchases, is, for now, permanent. For the last several years, the deduction limit is $500,000 to stimulate investment. “Businesses exceeding a total of $2 million of purchases in qualifying equipment have the Section 179 deduction phase-out dollar-for-dollar and completely eliminated above $2.5 million. Additionally, the Section 179 cap will be indexed to inflation in $10,000 increments in future years,” states Section179.org.
Also, the 50 percent “bonus depreciation” is extended through 2019. According to Section179.org, “Businesses of all sizes will be able to depreciate 50 percent of the cost of equipment acquired and put in service during 2015, 2016 and 2017. Then bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.”
Tackle Tangible Property Rules
The IRS issued regulations clarifying the rules on what qualifies as “expensable” repairs to tangible property (such as buildings, machinery, equipment, and vehicles), and what are considered improvements and, therefore, must be depreciated. Some important provisions define safe harbors for routine maintenance expenses and qualified small business properties, as well as increasing the threshold amount before depreciation is required for materials and supplies.
Routine maintenance consists of activities your construction business can reasonably expect to perform more than once during the property’s service life (as defined by the IRS) to keep it in efficient operating condition. Routine maintenance is generally considered a deductible expense.
“De minimis” rules, however, apply to the safe harbor election for expensing repairs. These rules are based on whether a company has audited financial statements. Businesses with audited financial statements can elect (in writing) to deduct expenses costing less than a specified dollar amount provided each invoice doesn’t exceed $5,000 (or per item if substantiated on the invoice). But, if no audited financial statements exist, the election is $2,500 per invoice/item.
Don’t Overlook Energy Deductions
Although the Energy-Efficient Commercial Buildings Deduction (Section 179D) has been in place for a decade, it’s often overlooked by contractors. If you build an energy-efficient building for your own use, or make improvements to increase the energy efficiency of a building you own, you may be eligible to deduct up to $1.80 per square foot.
In buildings owned by federal, state, or local governments, the deduction may be allocated to a contractor responsible for the energy-efficient construction or modification. If you’ve worked on schools or other government buildings, making energy-saving enhancements to systems, such as the building envelope, HVAC, hot water, and interior lighting, make sure you look into your eligibility for the Sec. 179D deduction.
File With Care
These are just a few of the top tax issues affecting contractors. Be sure to maintain thorough documentation of your financial activities throughout the year to make filing as efficient and productive as possible.
Increasing ACA Responsibilities
Some provisions of the Affordable Care Act (ACA) may affect your liability for taxes and fees, as well as the paperwork you need to submit regarding your employee health benefits. These requirements differ depending on whether your company is defined as a small or large business under the ACA.
Small employers can buy affordable insurance through the Small Business Health Options Program. If you have fewer than 100 full-time employees earning an average of less than $50,000 per year, and you cover at least 50 percent of their health insurance premiums, you may be eligible for a tax credit. If you self-insure, however, you’re now required to report certain information for each employee you cover. You may also be required to pay a fee to help fund the Patient-Centered Outcomes Research Trust Fund. You can find out more about the programs offered in Colorado using the Connect for Health Colorado site.
As a large employer, you may need to report the value of coverage you provide to each employee on his/her W-2 forms. You also must file an annual return in 2017 reporting what health insurance you offered employees (if any). Of course, if you don’t offer adequate coverage (as defined under the law), you may have to make a payment under the ACA’s employer shared-responsibility provisions.
There are a lot of items to consider as you approach year-end. Remember to consult with us, or your tax advisor, about the latest updates and strategies best suited to your construction business.