Dispatch #78 - End of Year Tax Planning for Contractors
I thought 2020 was a “dynamic” tax year, then came 2021!
PPP, ERC, FFCRA...an alphabet soup of COVID relief programs plus a slow, then fast, then a herky-jerky construction market rebound with unimagined supply chain disruptions. Disruptions that can swing a P&L one way or another at the end of the year depending on what equipment is installed and which projects start or delay in November and December.
The good news is that during both “status quo” and volatile years, there’s a clear script to follow with respect to tax planning. And if you take away one thing from this Dispatch, this is it: meet with your CPA.
Don’t worry, I know you're out there selling, keeping projects on track, honing market strategy, and leading your team, so no one expects you to be a tax expert.
But you can kick off year-end tax planning by asking your Controller, CFO or CPA to schedule a meeting – and nail down strategies and tactics.
Your CPA will advise what she or he needs to prepare for the meeting, and then during the meeting, you want answers to these questions:
What can we do to minimize taxes? Are we capturing research and development and employee retention credits? Maximizing depreciation? From the Work in Progress (WIP) schedule, can we defer any revenue or harvest any tax losses? Are we maxing out tax-advantaged retirement plans? What else should we do?
How much will we need to pay and when? Corporate and personal―look ahead at least six months. Do we have the cash to cover those payments?
How firm are our forecasts?
What might drive a year-end swing in taxable income?
When will our tax returns and CPA-prepared financial statements be ready? Avoid last-minute deadline panic and financial system disruption.
A good reminder: don’t spend money solely to save on taxes. Doing so means you actually end up with less money in your pocket. Spend money on things that move the business forward, and maximize the tax deductions from the same.
A quick recap:
Minimize taxes
No surprises
No (significant) underpayment penalties
Well-managed audit risk
Finally, remember that taxes are a good problem to have because it means you’re making money. The owners of best-in-class profitable construction companies pay taxes, so don’t feel like you’re “missing out” by paying them. That said, absolutely use the guidelines above to minimize your tax burden and use the savings to enjoy, save, invest, or give away.
Need help with this or other financial matters faced by construction contractors? Let’s talk!
David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.