As a construction or trade contractor, you are busy running your business. Finding and securing new jobs, performing the actual work, invoicing clients, and managing staff are just a few of your weekly tasks. Handling the accounting and tax portion of your business is another beast altogether. I would encourage you to outsource this work to a licensed professional, but you should still be aware of tax breaks you can take advantage of each year.
[Related: In the zone: How to save on state taxes]
Here are three specific tax breaks that I see clients underutilizing for tax purposes in their construction businesses.
Automotive expenses
Being a construction or trade contractor is a travel-heavy job. Most contractors know to deduct their gas, but there are other expenses that can be utilized here. For example, tolls, parking and mileage expenses are all justified. If employees are asked to use their own vehicles, have them keep track of mileage to and from jobs. Pay them the standard mileage rate ($0.575 per mile in 2020), which you can immediately deduct as a business expense.
If the business owns the trucks, keep a paper logbook, or use a smartphone app to track miles. You can then take the standard mileage rate or the actual expense rate (it is your choice). If you start with the standard mileage method, you can switch to the actual expense method at any time. Just know that if you switch to the actual expense method, you are stuck with that method until you dispose of the vehicle.
Internet advertising
Whether you are advertising for a listing or trying to attract customers, any money that you spend on advertising is deductible. When you place ads online yourself, get a receipt from the ad platform for your records. If you are paying a service to distribute the ads across the online, get a receipt or invoice for both the advertising spend and that company’s services.
Tip: Create a folder called “Vendor Bills” on your computer or in your email account, and use it to save all your online purchase receipts. That way they will all be in one place and easily accessible when you need them.
Legal and professional fees
If you need to have an attorney review a contract, you can expense their fees. If you have a CPA prepare your tax return, you can expense that as well. In fact, any professional service fee that will help your business function is deductible for taxes. If you need additional guidance in this area, check out this IRS Publication 334.
[Related: Are opportunity zones good for builders?]
Clients often ask me what can be expensed and what can not. The Internal Revenue Manual provides some clarity. Section 5.15.1.15(3) introduces the concept of “ordinary and reasonable expenses.” In general, ask yourself the following question to determine if an expense is ordinary or reasonable:
“Does this expense help the business earn money, save money or ensure the longevity of business operations?
If you answer yes, the expense in question is likely a justified expense for tax purposes. Hopefully, you can use this concept, and the three tax breaks above to help you put more cash in your pocket for more important business (or life) ventures next year.
Jacob Merkley is a licensed Enrolled Agent and is the founding partner of Western Tax Alliance, a tax resolution firm based in Las Vegas that is dedicated to serving the construction industry. He can be reached at [email protected] or 602-649-4779.
