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Tax Planning for Construction Companies

Document Type: Guide
Version: 1.0
Last Updated: February 2026
Distribute To: Owners, CFO, CPA

Purpose​

Provide an overview of tax planning considerations specific to construction companies.

Disclaimer​

This guide provides general information only. Tax laws are complex and change frequently. Always consult with a qualified tax professional for specific advice.

Construction Tax Methods​

Revenue Recognition Methods:​

Percentage of Completion (PCM):

  • Required for large contractors
  • Revenue recognized as work performed
  • Matches revenue and costs
  • Most common for larger contractors

Completed Contract Method (CCM):

  • Defer revenue until contract complete
  • Available if avg. annual receipts ≤ $29M (2025)
  • Tax deferral benefit
  • Not allowed for all contracts

Cash Method:

  • Available if ≤ $29M avg. receipts
  • Simplest method
  • May create timing benefits
  • Limited application

Choosing a Method:​

  • Consider average gross receipts
  • Contract types
  • Cash flow impact
  • Financial statement impact
  • Long-term strategy

Key Tax Considerations​

1. Long-Term Contract Rules​

What's a Long-Term Contract?

  • Manufacturing, building, installation
  • Not completed in year started
  • Special tax rules apply

Look-Back Interest:

  • Compare actual to estimated
  • Interest on underpaid tax
  • Planning can minimize

2. Section 199A Deduction​

Qualified Business Income Deduction:

  • Up to 20% of QBI
  • Available to pass-through entities
  • Construction generally qualifies
  • Phase-outs at higher income
  • Expiring provisions - monitor

3. Depreciation​

Current Options:

  • Bonus depreciation (currently phasing out)
  • Section 179 expensing
  • MACRS schedules
  • Real property considerations

Planning Opportunities:

  • Time equipment purchases
  • Consider lease vs. buy
  • Real estate cost segregation
  • Monitor changing rules

4. Research & Development Credit​

Construction May Qualify:

  • Design and engineering
  • Prototype development
  • Process improvement
  • New construction methods

Requirements:

  • Technological uncertainty
  • Process of experimentation
  • Qualified purpose
  • Documentation critical

Entity Structure​

Common Structures:​

StructureTax TreatmentKey Features
S CorporationPass-throughSE tax savings, limitations
C CorporationDouble taxLower rates, benefits
LLC (Partnership)Pass-throughFlexibility, complexity
Sole ProprietorshipPass-throughSimple, liability risk

Considerations:​

  • Owner compensation
  • Self-employment tax
  • Distribution flexibility
  • Exit planning
  • State tax implications

Compensation Planning​

Owner Compensation:​

S Corporation:

  • Reasonable salary required
  • Distributions avoid SE tax
  • Balance salary and distributions
  • Document reasonableness

Reasonable Compensation Factors:

  • Duties performed
  • Time devoted
  • Comparable salaries
  • Company profitability
  • Historical compensation

Employee Benefits:​

  • Health insurance (deductible)
  • Retirement plans (deductible)
  • Fringe benefits
  • Accountable plans

Retirement Plans​

Options for Contractors:​

PlanMax ContributionComplexity
SEP IRA~$69,000 (2024)Simple
SIMPLE IRA~$16,000 + matchSimple
Solo 401(k)~$69,000Moderate
401(k)~$23,000 + matchComplex
Defined BenefitVaries (high)Complex

Planning Opportunities:​

  • Maximize deductions
  • Retain key employees
  • Defer income
  • Build wealth

Year-End Planning​

Before Year-End:​

Review:

  • Projected income
  • Tax bracket position
  • Cash flow needs
  • Investment plans

Consider:

  • Accelerate deductions
  • Defer income (if beneficial)
  • Equipment purchases
  • Bonus depreciation
  • Retirement contributions
  • Charitable giving

Income Timing:​

  • Bill timing (cash method)
  • Contract timing (CCM)
  • Change order timing
  • Collection timing

Expense Timing:​

  • Prepay deductible expenses
  • Accelerate repairs
  • Equipment purchases
  • Bonus payments

Common Deductions​

Business Deductions:​

DeductionNotes
Vehicle expensesMileage or actual
Home officeIf qualified
Professional feesCPA, attorney
InsuranceBusiness-related
InterestBusiness loans
AdvertisingMarketing costs
TravelBusiness travel
Meals50% limitation (business)
EquipmentDepreciation/179

Often Missed:​

  • Cell phone (business %)
  • Software subscriptions
  • Professional development
  • Association dues
  • Trade publications
  • Bank fees
  • Bad debts

State and Local Taxes​

Considerations:​

  • Where you work (nexus)
  • Where employees work
  • Multi-state projects
  • Withholding requirements
  • Sales/use tax on materials
  • Local taxes

Planning:​

  • Understand nexus rules
  • Proper withholding
  • Use tax compliance
  • State-specific benefits

Audit Preparation​

Maintain Records:​

  • Income documentation
  • Expense receipts
  • Mileage logs
  • Time records
  • Contract files
  • Correspondence

Audit Triggers:​

  • High deductions vs. income
  • Large cash transactions
  • Inconsistent reporting
  • Industry-specific issues
  • Random selection

Working with Tax Advisors​

Find the Right CPA:​

  • Construction experience
  • Proactive planning
  • Accessible
  • Reasonable fees

Throughout Year:​

  • Quarterly estimates
  • Planning meetings
  • Major transaction review
  • Year-end planning

Information to Provide:​

  • Clean financials
  • WIP schedule
  • Equipment list
  • Loan schedules
  • Personal financials
  • Financial Reporting
  • Cash Flow Management
  • Succession Planning
  • Business Planning

References​

This guide is general information only. Tax laws change frequently. Key resources:

  • IRS.gov
  • State tax authorities
  • Qualified CPA

Template provided by support.construction. Tax planning is year-round, not just April.