How to get the most out of your deductions
Construction and tradespeople struggle with cash flow. They often pay for their next job with their current job. Analyzing costs and income can help you better manage cash flow. Mariana Alvarez of Controller Works sees this all the time as she helps construction professionals with their bookkeeping and accounting.
“With the economy being a bit unpredictable, small businesses are paying closer attention to their cash flow than ever before,” she says. “They’re actively keeping tabs on what’s coming in and going out, using tools for forecasting and planning to stay ahead of the game.”
You can catch more strategic tax deductions when you keep closer tabs on your cash flow. You can even automate the required documentation for deductions.
“Automation tools are getting better every day, making it much simpler for small businesses to handle things like invoicing, tracking expenses, and reconciling accounts,” says Alvarez.
1. Writing off materials and supplies
Working in construction requires a significant investment in materials and supplies. The cost of these items can quickly add up, but the good news is that you can deduct these expenses if you use them in your business. Whether it’s lumber, concrete, wiring, or plumbing fixtures, keep track of your material costs. Deducting them can help reduce your taxable income.
2. Labor cost tax deductions
As a contractor, you rely heavily on the skills and expertise of your employees and subcontractors. The wages, salaries and benefits you pay to your workers are generally tax-deductible. This deduction may also include any additional expenses such as payroll taxes, insurance premiums and retirement plan contributions (including pensions, profit-sharing or annuity plan contributions you make on behalf of employees).
3. Business insurance premium write-offs
Insurance is a vital aspect of any construction business. The premiums you pay for general liability insurance, workers’ compensation, and other business-related coverage can be deducted. This deduction not only protects your business but also provides a valuable tax benefit.
When you’re closing up your books for the year for taxes, it’s a good time to reflect on your current insurance for your construction business. You can make adjustments as your business grows. You can deduct business insurance expenses. Here are some typical small business coverage options that you can often deduct:
- General liability insurance: If you are hired to work on other people’s property, you want to make sure you have general liability insurance. It covers property damage and injuries to other people’s property.
- Workers’ compensation: General liability coverage doesn’t cover employee injuries so you will need workers’ comp for this. It is also required in most states if you have employees.
- Commercial property insurance: If you have a commercial space that houses your equipment or supplies, you will need to protect it with commercial property insurance.
- Commercial auto insurance: Most tradespeople work out of their vehicles. Take the time to ensure you’re properly insured if you get into an accident or cause other damage. Commercial auto insurance also covers the equipment and supplies you store in the vehicle.
4. Writing off the cost of equipment and tools
Construction equipment and tools are essential for your business operations. Whether you purchase or rent them, many of their associated costs can be deducted. This deduction covers a wide range of items, including heavy machinery, power tools, safety equipment and even smaller hand tools. Remember to keep track of these expenses.
5. Vehicle expenses for your tax return
You’re likely driving between job sites, picking up or dropping off materials and more. If you use vehicles for business purposes, you can deduct the expenses associated with them including fuel costs, maintenance, repairs, insurance premiums, registration fees, and even depreciation. Be sure to maintain accurate records of your business mileage to support your deductions.
You will need a separate commercial auto policy for your work vehicle. You can deduct expenses related to commercial auto insurance.
6. Home office deductions
Do you have a dedicated space in your home for administrative work? If you have a home office, you may be eligible for the home office deduction. This deduction allows you to deduct a portion of your home expenses, such as rent or mortgage interest, property taxes, utilities and maintenance costs.
7. Write-offs for professional services
As a small business owner, you may require the services of accountants, lawyers, consultants, or other professionals. The fees you pay for these services are deductible. Whether it’s tax preparation, legal advice or consulting on business strategies, keeping track of these expenses can help reduce your tax liability.
“More and more businesses are opting for fractional CFOs and outsourced accounting help to handle their financial tasks without the expense of a full-time hire. This is especially popular with family-run companies that want expert advice and insights without the big price tag that comes with an in-house CFO,” says Alvarez.
8. License and permit fees
To operate legally, construction contractors often need to obtain and renew various licenses and permits. The costs associated with these licenses and permits are typically deductible. This deduction ensures that you can recoup some of the expenses incurred in complying with regulatory requirements.
9. Tax write-offs for advertising and marketing fees
Promoting your construction business is essential for growth. Luckily, expenses related to advertising and marketing are deductible. Whether it’s creating a website, printing business cards, running online ads or sponsoring local events, these expenses can be written off.
10. Education and training costs
Staying updated with industry trends and enhancing your skills is crucial for a successful construction career. The expenses incurred for industry-related courses, seminars, workshops and certifications are deductible. By investing in your professional development, you not only improve your expertise but also gain tax benefits.
11. Office supplies
Running an efficient office requires various supplies, such as paper, pens, printer ink, and other necessary items. These office supplies are considered deductible expenses. Keeping track of these costs adds up and ensures that you can claim the appropriate deductions.
12. The costs of utilities for your business
If you have a dedicated office or workspace, a portion of your utility bills can be deducted. This includes expenses for electricity, water, internet and other utilities used for your business operations. By calculating the percentage of your home or office space used for business, you can claim a corresponding deduction.
13. Repairs and maintenance
Construction equipment, tools and business premises require regular maintenance and repairs. These expenses can be deducted, ensuring that you can recoup some of the costs associated with keeping your equipment and premises in good working condition.
Understanding and utilizing the available tax deductions can significantly impact your bottom line. By taking advantage of these deductions, you can minimize your tax liability and maximize your savings.
