As 2022 wraps up, we want to help our clients find ways to save on their taxes. We believe you deserve to keep as much of your hard-earned money as possible!
One of the industries that we work with a lot, construction, is in a great position to save quite a bit on their taxes at the end of the year. New home construction tax deductions are everywhere…if you know where to look.
In this post, we’ll show you several construction tax deductions, talk about construction sales taxes, and point out how you can take advantage of new construction tax credits.
Construction Tax Deductions
A construction tax deduction is a business expense write-off that decreases your tax liability with the IRS. Those expenses have to qualify (your family beach vacation, for instance, isn’t a deduction) in order to be legitimate, but the ones that do can really decrease the amount of your overall income that the IRS bases your taxes on.
In order for an expense to qualify, it generally has to be “necessary and ordinary.” Meaning, if it is a cost you incurred as part of the normal operations of your business and it is essential to running your business, it will (more than likely) be deductible at the end of the year.
Your CPA can help make sure each one is applicable and legal. It is definitely worth your time to make sure you are taking every deduction that your business is entitled to!
Back before Tax Day last April, we talked about 3 big tax deductions for contractors that anyone who is in the business of building needs to pay attention to. They are:
- Tools & Gear – Everything you use to get the job done can be a deduction.
- Licenses – The money you paid to stay legal in your profession is deductible.
- Mileage – Since you probably aren’t building from the comfort of your own home, all those miles that add up can add up to significant tax savings.
But those are just the tip of the iceberg when it comes to construction tax deductions. Here are a few more to keep in mind:
Self-employment TaxIf you worked for someone else as a regular employee, you and they would share in taking Medicare and Social Security taxes out of your paychecks. However, as a small business owner, the responsibility for paying all of those taxes is fully on your shoulders. As a result of that expense, you are able to claim self-employment taxes you pay as a deduction on your taxes.
Marketing CostsIn order to attract customers to your business (so you can stay in business!), you probably spend a good amount of money each year on advertising and marketing. Costs related to marketing are deductible and can include expenses like digital advertising, print materials, and the purchase of equipment needed to create those things (cameras, printers, etc.)
SubcontractorsIn construction, there are a lot of pieces to the puzzle. It’s not possible for one person to be an expert in everything, so it is common for contractors to hire specialists to come in and work on specific parts of a project. The money you spend paying for subcontractor labor is considered a deductible expense, so be sure to keep track of it.
Interest on DebtMost contractors aren’t sitting on piles of cash when they start a construction project, which means that you usually have to take out some sort of loan to get things going. Any interest you pay on that debt can also be written off on your taxes.
TaxesYes, you can deduct taxes when you pay your taxes. Some of what you pay in state taxes or employment taxes can be used to help lower your current tax bill.
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Construction Tax Rate
When it comes to construction in the U.S., there are a variety of rules regarding sales tax. Most states require contractors to pay sales tax when purchasing supplies and materials for building projects.
However, even though you pay taxes at the time of purchase, you are not responsible for paying sales tax when you sell the completed property. So the amount of markup that you charge the customer to cover materials won’t be taxed again.
There are a handful of states that treat contractors as resellers, though (Arizona, Mississippi, Hawaii, New Mexico, and Nebraska). In those states, they do not have to pay sales tax on construction materials.
Here in Tennessee where we have offices in several locations across the state (Jackson, Dyersburg, Paris, Brownsville, Martin, and Milan), the state has this policy on sales and use tax for contractors:
“Generally, contractors and subcontractors are users and consumers and must pay tax on the purchase price of materials, supplies, and taxable services that are used in the performance of their contract to make improvements to realty. Contractors generally owe sales or use tax on the purchase price of the materials even when contracted by tax-exempt agencies or organizations.”
If you are working with a tax-exempt organization, you might want to consider having them purchase the construction materials…saving on sales tax and lowering the overall cost of the job for them.
New Construction Tax Credit
In addition to multiple deduction opportunities and ways to reduce sales taxes, there are several new construction tax credits available for contractors as well.
Energystar.gov has information on updated tax credits for home builders that can be claimed as a result of the recently passed Inflation Reduction Act as part of updated 45L credits.
Starting in 2023, single-family, multifamily, and manufactured home builders who meet certain energy efficiency requirements can benefit from quite a bit of tax savings.
- $2500 for single-family homes
- $2500 for manufactured homes
- $500 for multifamily units
Even larger credits are available for companies that build homes certified as “Zero Energy Ready” as part of the Department of Energy’s ZERH (Zero Energy Ready Home) Program. Such homes are built in such a way that “a renewable energy source could offset most or all of the homes energy use.”
If you work with commercial buildings, you can deduct up to $1.80 per square foot if you are able to demonstrate a 50% reduction in energy usage through improved heating, cooling, ventilation, water, and lighting. The IRS is in the process of updating information about tax deductions for commercial buildings, so check with your CPA for more details.
Additionally, if you are a contractor working with existing homeowners to make improvements/repairs to their residences, you may want to remind your customers of energy incentives for individuals from the IRS that they can take advantage of by installing:
- Energy-efficient windows and doors
- Certain roofing materials
- Improved insulation
- Efficient heating and AC units
- Natural gas, propane, or oil water heaters
- Biomass stoves
Construction Tax Write-Offs
We’ve touched on just a few of the many construction tax write-offs available to you as a contractor. For more information–and to make sure you’re not leaving good money behind when you file your taxes this year–check with your tax advisor about your specific situation.
Keepertax.com has put together a well-arranged list of “28 Tax Write-Offs for Construction Contractors” that not only show you what you can deduct but which form you’ll need to be sure to use for each one.
Don’t Waste Money When It Comes To Construction Company Tax Deductions
You work too hard to overpay on your taxes. For 40 years, we’ve devoted our company to making sure construction contractors in Tennessee pay their fair share of their taxes accurately and on time. And we work hard to help them keep as much as possible too!
Schedule a call with one of our tax experts today to find out how much we can help you save!