A Quick Guide to Maximizing Tax Returns for Subcontractors

Taxes. Everyone’s favorite topic, right? Especially for subcontractor business owners familiarizing themselves with construction industry tax minutiae. But, if you master the details you also avoid leaving money on the table. We want you to squeeze every last cent out of your return, so we sat down with a construction industry CPA to hear what advice she had to share with her subcontractor clients. 

Before we dive into the specifics, the best piece of advice she shared was: don’t take advice. When it comes to reducing taxes owed you’ll hear advice from everyone under the sun about what you should be doing, but we encourage you to scrutinize everything and not take what you hear at face value. Just because it worked for someone else doesn’t mean it’s best for your business.

Lastly, we have to say it, there is no magic bullet to reducing taxes. This article is for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Of course, we encourage you to consult with a tax professional before implementing any of the strategies below. 

Deductible Expenses You May Be Missing Out On

Many businesses overlook basic tax deductible expenses. Don’t be that guy. Below is a list our expert CPA recommended you look out for:

1. Yes, lunch with your GC is deductible – As a relationship-based business, construction companies can deduct for schmoozing. Lunch with your top GC is a good example of this kind of expense (I hope you sprang for oscar-style because you can claim 100% deduction at a restaurant in 2022, but it’s going back to 50% in 2023). 
2. Your vehicles are the gift that keep on giving – Subcontractors tend to be vehicle heavy, and how you treat vehicles when filing your taxes is probably the #1 missed opportunity for deductible expenses. Here’s what we heard: 

• • For your personal vehicles, track all the mileage you put on them throughout the year and charge the company based on mileage. The company will reimburse you based on mileage, and that mileage is tax deductible for the company. If you have the option to pay for gas on the company card, consider going the mileage route instead, because that includes wear and tear (you can’t double dip and do both).
  • Your trips between job sites, those can be deductible. Even your hikes across town to pick up your hard-earned checks from your GC. As long as they’re not your first destination of the day.

With all your hours on the road and the right documentation, this has the potential to be a lucrative write-off.

3. Leasing or renting equipment, here’s what to consider – If you decide renting or leasing equipment makes sense for your business, or on a particular project, you can deduct the cost. The benefit of leasing or renting equipment is that, generally, maintenance comes with it. But, if not you can at least deduct those expenses on your taxes. Unfortunately, you won’t get to claim depreciation on these assets, even on long-term leases. 

4. The inevitable wear and tear on owned equipment – Countless assets used by subcontractors like equipment, vehicles and heavy machinery will be used for years and are subject to depreciation if those assets are owned by the business, or under a conditional sales contract. What’s equally exciting about this is that you have flexibility on when to save.

Depreciable assets can be used to claim deductions over multiple years or they may be eligible for accelerated bonus depreciation in the year you purchased the asset. That means you can front load your depreciation benefits on 100% of the item’s value (changing to 80% according to the IRS). 

• Interest expense – As a subcontractor, there are a lot of reasons to love financing, but the one that doesn’t get brought up often is the tax deductible nature of interest. While the principal on debt is not tax deductible, the interest is. So, go ahead and leverage financing to take on that bigger project.

The “Check Before You Deduct” Expenses that Aren’t Viable or Recommended, Despite What Many Might Think

1. Principal payments on debt – While interest payments on debt may be tax deductible, the principal payments are not. Consider the benefits of keeping extra cash in the business versus putting it towards debts.
2. If you made an acquisition this year, you’ll need to be detailed – You cannot take the money you spent as a whole to purchase the company as a tax writeoff. BUT you can deduct specific things that you used that money to buy, like equipment. In order to maximize your deductions make sure that you have detailed line items in your paperwork on what is conveyed.

Best Practices to Keep Your Taxes in Check

1. Maintain Accurate Financial Records It goes without saying, but have a dedicated person in the office whose sole job is to maintain the books, or hire a bookkeeping firm to fulfill that role. Close the books and reconcile every account in the financial statement at the end of the month.
   • The CPA we spoke to encourages you to specifically maintain the following: 
     • A work in progress schedule
     • Billing per job
     • Cost per job
     • A solid estimating process  
       • Update your estimated costs as needed
       • Pay attention to them all throughout the year
2. Hire an Expert and Avoid Guesswork – Taxes are inherently nuanced and complex. Hire an expert to ensure you are setting everything up correctly and aren’t missing any of the hairy details. There is always a chance that you could get audited, and a sloppy tax job will hurt you in the long run. When push comes to shove, hiring an expert is the number one piece of advice the CPA could give you. Not doing so is the #1 mistake she sees subcontractors make. The best part? Their services are generally tax-deductible as well.

Tax write-offs are a blessing for anyone who owns a business. While they minimize the burden of running a business, finding all of the write-offs available to you can be a burden in and of itself. This tax season, take a slow and patient approach to your write-offs, go through your financial documentation carefully, and above all else, hire an expert to help you navigate the jungle that is the construction tax space.