Nobody likes tax surprises, and the construction industry is certainly not an exception to this rule. And while tax reform was discussed but not enacted in 2021, advisors would be remiss if they did not explore income tax strategies and options with their construction clients as we move through 2022. Based on the types of contracts a construction company performs under, there are opportunities to employ an accepted income tax deferral strategy. For example, while a construction company’s overall method may be accrual, to the extent any projects are completed within a single tax year, that project could qualify for cash basis. Further, a residential contractor (not houses) could employee a 70-30 accrual-cash basis split on reporting a qualifying project for tax.
Also consider that, even if nothing changes, we know the current income tax rates will sunset by the close of 2025. If a contractor is already employing an accepted deferral methodology, the strategy could shift to accelerating the recognition of income for tax advantage at the lower rates, which is a real dollar savings.
These are powerful techniques that should be fleshed out, especially since cash flow is vital to a project’s success. Siphoning off cash unexpectedly due to an April 14 phone call can be extremely detrimental to the construction contractor.
This article is the third in the series, Top 5 Contractor Strategies for 2022, from Grassi’s Construction team. Also read about our first two strategies to help your construction company navigate the year ahead:
Strategy #2: Live Your Cash Flow Forecast and Budgets