After ending 2014 on an economic high note, business spirits, especially those of construction firms, are rising with the hopes of more economic prosperity in the new year. Jobs are growing, the government is taking steps to incentivize homeownership and the national building rate indicates a recovery—making it a particularly important time for construction firms.
While business owners must stay focused on growing their operations, they also must remain realistic, which means keeping a vigilant eye on the quickly approaching tax filing season. Tax season brings with it a whole host of considerations for small and medium-size construction businesses (new forms and filing requirements).
For construction firms, time and labor constraints make preparing for tax filings particularly difficult. Whether it's hauling around from site to site or getting dirt on paper receipts, the demands of being a construction business owner get in the way of preparing for taxes. That's why it's crucial to look into deductions and preparation strategies. Even the slightest mistake may invite an IRS audit, or at the least, limit the tax refund you deserve. Listed below are a few of the items to consider before you get started.
Understand Section 179
The Section 179 deduction could be typified as the most important small and medium-size business deduction for construction firms. Under Section 179, businesses can lease or finance new or used equipment and deduct the total price of qualified assets put into use during a given tax year. Businesses can acquire an array of equipment covered under Section 179, including new heavy machinery, vehicles for business use and back-office software.
In 2014, owners had to operate under the expectation the limit would be $25,000 for the year. However, in December, a tax extender was reached for the 2014 tax year only that raised the limit to $500,000. Because of this, it makes sense for owners to go back into their logs and consider what equipment procurements were made that could qualify under the deduction.
No tax extender has been reached for the tax year 2015, and the limit is once again back to $25,000, but this could change. A Republican-controlled Congress often leans to the side of business, and rumors have already been raised regarding a permanent upward expansion of the Section 179 deduction limit. Construction firm owners may be advised to start planning out their equipment needs: itemize models, seek knowledge on upgrades and identify new equipment needed. To acquire alongside developments in Section 179 discussions, owners should have a plan in place for equipment procurement.
Changes to Schedule M-3 Filing
In conjunction with understanding Section 179, medium to large-size businesses should also remain aware of recent changes made to how their Corporation Income Tax Return is filed, in regards to Schedule M-3, also known as Form 1120.
A change at the end of 2014 has made it possible for certain entities, including corporations and partnerships, to file Schedule M-1 (Form 1120-F) in place of Parts II and III of Schedule M-3. These changes were made to help streamline the process and reduce extra steps and confusion around tax filings.
Other parts of Schedule M-3 have remained the same. The filing, as part of a corporation's income tax return, continues to apply to corporations and partnerships that have between $10 million and $50 million in total assets. In place since 2004, the M-3 filing strives to increase taxpayer transparency with the IRS, as adjustments are often made to a business' financial statements and records in preparing for tax filings.
Medium to large-size construction companies often have a lot more moving pieces than small businesses. This is a great time for business owners to look inward and retool internal practices among project and equipment management to increase transparency within the company.
If you're using a tax professional to prepare your corporate income tax return, make sure that he or she is an IRS authorized e-file provider, equipped with the proper software to submit the return electronically. Also, be sure to have an efficient internal process in place for reviewing your records with your designated tax professional to ensure accurate and timely filing.
For proper tax filings, nothing matters as much as accurate recordkeeping. Not only will it ensure you are adequately prepared to deal with any inquisition to records, but it's common sense.
Accurate recordkeeping is a good overall business practice and will maximize the money you get back on tax returns. New technology also facilitates better recordkeeping (the software used to house your tax records may be deductible under Section 179). Here's where to start:
- Get scanners
It makes sense to invest in a stable of scanners to distribute to employees on-site and in the office. Being able to scan, immediately save and have access to every document your business will need to disclose or consult in tax filing is a priceless advantage. Cloud enterprise services also make sense; just make sure you find a vendor with the highest security and storage protocols.
- Keep old processes, but transfer documents
It may be easier to record business miles in a log book stored in the glove compartment than to purchase and use a tablet. But, make sure older processes like these are transferred over to electronic records once the log is completed.
- Pay careful attention to certain items
Construction owners need to keep an eagle eye on a couple specific filing items. Auditors highly scrutinize business vehicle use, as well as personal expenses, donations and entertainment for staff and clients. The best way to protect yourself is to be particularly steadfast in keeping records organized and preserved for these items.
- Independent contractor dealings
Independent contractors are a category of their own for construction businesses. Misclassification is a serious misstep. As an employer, you need to be especially careful in how you classify and document these workers.
- Keep an eye on the future
Even if you are not already required to abide by the employer mandate (all businesses will be by next year), it is still important to keep thorough records for documenting insurance coverage for tax reporting. The Affordable Care Act "pay or play" penalties are increasing, and businesses need to be precise in how they report health care coverage extension.
Tax filing season is a rush for construction firms that are already busy with building amid an economic recovery. Knowing the specifics of available tax deductions and keeping the records to back up your claims is essential for business owners, especially those in the construction industry.