Guide to Tax Deductions for Small Construction Businesses
Running a small construction business involves managing a wide range of expenses; however, you can often reduce your business taxes by taking advantage of deductions. By understanding what deductions are available and how they work, you can optimize your financial strategy every tax year.
Top Tax-Deductible Expenses for Small Construction Businesses
The following are some of the most valuable and common tax deductions for small construction businesses. Claiming these tax deductions will help you avoid overpaying at tax time.
Business Expenses
These are the costs associated with running your construction company. These business expenses can be deducted from your income to reduce your taxable profit.
Construction materials. This allows you to deduct the money spent on construction materials used in your building projects, such as lumber, concrete, and electrical and plumbing supplies.
Equipment. Leased construction equipment and tools are tax-deductible (for example, excavators and power tools).
Safety equipment and uniforms. Steel-toed boots, hard hats, safety glasses, AED devices, and construction-related clothing can be deducted.
Contract labor. You can deduct wages paid to independent contractors working at a job site.
Permits and licensing fees. The fees you pay to obtain necessary permits and licenses during the building process on a job site can be deducted.
Depreciation of Business Assets
You can deduct depreciation on expensive construction equipment, tools, and business-use-only vehicles provided you own them and they have a useful life exceeding one year. Three common depreciation methods exist:
Straight-line: Spreads depreciation equally over the item's useful life.
Accelerated: Deducts more in the initial years and less in later years.
Section 179: Deducts the asset's entire cost in the purchase year.
Vehicle Expenses
If you use a vehicle for your business, you can deduct vehicle expenses by using one of two options:
Standard mileage rate method. This method is designed to compensate you for gas, maintenance, and depreciation on a per-mile basis. The IRS standard mileage rate for 2023 is 65.5 cents per mile.
Actual expense method. You will calculate and deduct the actual expenses incurred, including costs like gas, vehicle maintenance and repairs, parking fees, and the vehicle's depreciation.
These deductions can significantly reduce your taxable income, so keeping meticulous records of your expenses and mileage is essential to ensure you claim all the deductions you're entitled to.
Travel Expenses
Expenses associated with visits to construction sites or meetings with clients (including travel, business meals, and lodging) are eligible for tax write-offs.
Taxes
There are various taxes paid throughout the tax year that can be deducted.
Self-Employment Tax
Unlike regular employees who share employment tax responsibilities with their employers, a business owner is responsible for paying all their employment taxes. You can offset this expense by deducting the self-employment taxes that you paid during the year.
Taxes on Leased Property
When leasing business property, you can claim additional rent deductions if you pay taxes on the property.
Sales Tax
Contractors and subcontractors in certain states must collect sales taxes on their services and remit them to the relevant tax authority.
For example, in Florida, the obligation to pay sales tax on construction work can differ based on the type of construction project. It is recommended to consult with a tax advisor to ensure you understand the rules.
Many of our clients in Jacksonville, Florida, and the other states we serve are happy to learn that the sales tax they paid can be reclaimed through sales tax deductions on their tax return.
Home Office Deductions
If you use part of your home exclusively for business purposes, you may qualify for home office deductions by declaring the following:
Mortgage interest or rent. If you have a dedicated office space in your home for your business, you may be eligible to deduct a portion of your mortgage interest or rent.
Utilities. You can claim deductions for home office utilities like electricity, internet, and a dedicated business phone line.
Insurance. This allows you to deduct the portion of your homeowner's or renter's insurance that covers your home office.
Employee Expenses
Deductible employee expenses include wages, bonuses, fringe benefits, employment taxes such as the employer portion of Medicare and social security taxes, and benefits such as health insurance and retirement plans.
Education and Training
You can write off continuing education expenses related to courses or workshops that enhance your construction skills. You can also deduct costs related to employee training programs and maintaining professional certifications.
Marketing Expenses
Marketing expenses encompass promotional costs like advertising, website development, and promotional materials. These costs are vital for business growth and attracting clients, and the IRS permits deductions for many marketing expenses, enabling construction businesses to invest in promotion, expand their client base, and reduce their tax bill.
Insurance Premiums
You can deduct premiums for business insurance coverage, including liability, property, and worker's compensation insurance.
FAQs
What Are Construction Tax Deductions?
A construction tax deduction is a legitimate business expense that reduces your tax liability. To qualify, an expense must be "ordinary and necessary," meaning it's essential for your business operations and typical in the construction industry.
Pro tip: IRS regulations often change, so it's advisable to seek guidance from a tax professional on identifying all the expenses that qualify for deductions.
Who Can Claim Construction Business Tax Deductions?
Tax deductions can be taken by any business involved in construction, whether you are a sole proprietor (i.e. self-employed contractor), LLC, partnership, or corporation.
How Do Tax Deductions Help Construction Companies?
Before looking at specific tax deductions for construction businesses, it's crucial to understand how they can benefit your bottom line. Tax deductions essentially reduce your taxable business income, which lowers the amount of income that's subject to taxation. This will reduce your overall tax liability, allowing you to keep more of your hard-earned money in your business.
Maximize Your Deductions
Running a small construction company requires careful financial management. By taking advantage of tax deductions, you can optimize your tax savings and keep more of your earnings within your business. However, it's essential to stay organized and keep detailed records of your expenses to ensure you don't miss out on valuable deductions.
To maximize your deductions this tax year, consider consulting a tax professional who specializes in construction bookkeeping and accounting services. A tax advisor can provide expert advice on tax planning, help you identify eligible deductions, ensure compliance with federal and state tax regulations, and assist with your tax preparation.
