Trying to navigate the Byzantine labyrinth of IRS rules and regulations can be an overwhelming process, even for tax professionals. However, understanding the nuances of allowances, deductions and exemptions offered by the revenue service can truly benefit a construction company, leading to increased savings, higher profit margins and greater overall success.
Section 179 is one of the most immediate ways the IRS provides a financial boon to construction firms. This portion of the tax code is an exemption that small to mid-sized businesses can use to save money on capital expenses. This allows companies to make the crucial investments on the equipment, machinery, tools and technology necessary to grow the business and expand into new markets.
Background on the Bill
Historically, this exemption was limited to $25,000 in capital expenses per year. While Congress would sometimes amend the rule to stimulate the economy or slow down growth, this uncertainty made it extremely difficult for construction company owners to set particular targets and subsequently reach them. This sliding scale of exemptions and deadlines often led to having to plan out the next year using guesswork about whether the deduction would be made available, which negatively affected budgeting, financial forecasting and a host of other business-related objectives.
However, on December 18, 2015, Congress passed the Protecting Americans from Tax Hikes Act of 2015, which President Barack Obama signed into law shortly thereafter. This bill expanded the previous deduction limit of $25,000 to 20 times its previous amount. Further, the PATH Act also made this new $500,000 exemption permanent, providing much more stability and consistency for companies to make more informed decisions for capital purchases and other necessary investments. In addition to the $500,000 limit, this amount will now be indexed for inflation, which means it will continue to increase based on how much a dollar can purchase. Overall, it is a great new incentive for construction business owners to finally make those capital expenditures they might have otherwise been holding off on making.
How Construction Firms Benefit
Owners of construction companies have a variety of daily obstacles to overcome and goals to meet. One of the major decisions that must be made on a regular basis is what investments to make pertaining to equipment and machinery. These purchases can make or break a construction firm, and the purchase of the equipment and machinery is not undertaken lightly. For many small and mid-sized firms, the deciding can sometimes unfortunately be the cost associated with the purchase.
However, now that the tax season is underway, owners of construction firms can take advantage of Section 179 exemptions in a variety of ways, all designed to help boost investment capabilities and increase operational capacity. With the new rules firmly in place moving forward, construction business owners should begin identifying new equipment needs, itemizing new models and consulting with professional advisors on the best course of action. The amount that can now be deducted is nothing to overlook, and this half a million dollars can make a world of difference for a small construction business that needs to grow.
Having the latest and greatest technology is usually a surefire way for construction companies to stay competitive in an increasingly disruptive industry. Working without the best tools available can leave a construction firm scrambling to keep up with their industry peers, often to the detriment of the business. Tools and equipment that might have been out of reach for smaller enterprises are now much more accessible and make for a fiscally sound investment. The Section 179 deduction also works with leased equipment as well, which can provide additional benefits in terms of training employees, staying up to date on technology and reducing the depreciation levels of the leased machinery.
Despite the many significant benefits, there are limits to what is considered a capital expense and what is covered under the Section 179 deduction. For instance, a construction company cannot write-off the purchase of land, inventory or buildings. In addition, the deduction does not cover intangible property, such as trademarks, copyrights or patents, nor does it include any expenses involved in procuring these items, such as the cost to file for these or any attorneys fees paid to prepare for these filings.
Consider Technological Solutions
Lugging around massive binders full of receipts, contracts, specs, drawings, worker logs and a pile of other necessary documents from the office to the jobsite and back again increases the possibility that something will ultimately get lost or covered in dirt. Throw in additional paperwork and documents from subcontractors and vendors, and soon enough, a general contractor or project manager can become inundated with more information than they can handle. However, each of these individual pieces of paper are extremely necessary when it is time to file taxes, especially when it involves obtaining those important exemptions and deductions. Although it can be a hassle, good recordkeeping ultimately maximizes the potential for a greater tax return.
One way that construction owners can improve their data storage capacity is by investing in a cloud-based software solution. Just like any other technological innovation, these digital platforms continue to evolve and meet the demands and expectations of construction companies. By storing all of the information and data in a single repository that all relevant team members have real-time access to, construction firms can easily keep track of every document and receipt, which makes tax season a lot more streamlined and less of a headache.
