Year-Round Tax Strategies to Increase Landscape Business Success

Use this starter checklist for year-round tax preparations to establish long-term growth and sustainability for your contractor business.

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To gain maximum impact during tax season, contractors need to take a holistic approach to tax planning and invest in year-round preparation. While most tax strategies strive to defer income to the next tax year and accelerate expenses in the current year, strategic tax planning takes into consideration many other factors, including how reducing income for tax purposes will affect financial statements, cash position, capitalizing on current elections and much more. For example, when deciding on a lending and bonding program, lenders and sureties rely on the strength of a contractor’s financial statements and the company’s character, capacity and capital. Customers also review these metrics to ensure that the contractor is financially strong and can meet their performance obligations.

Whether you work with an accounting firm specializing in the construction industry or not, tax season is not the only time you should meet with your trusted adviser to discuss business planning. These conversations should happen regularly to ensure your business is sustaining growth now and in the future.

Here are year-round strategies to help ensure long-term growth and sustainability.

Find the right adviser

An adviser who knows your industry and has deep knowledge of local and state tax laws, credits, and pronouncements will save time, frustration and money. A contractor-focused accounting firm with a large book of similar-sized clients can demonstrate the company’s specific experience and strength in the space. Don’t be afraid to “interview” the firm you’re considering working with. Ask about relevant criteria and details about their team’s expertise within your industry and learn who your team members will be.

  • Has the firm taken on new landscape contractor clients and provided those new clients with changes in tax reporting methods?
  • Ask for references and request feedback on why they have stayed and what they’ve learned from working with them.

Your tax adviser is an extension of your team, and you want to ensure it is the right fit.

Determine the proper accounting method

Even though this year’s tax season is in full swing, there are still things companies can do to benefit from this tax season. Contractors should confirm that the tax reporting method they’re using for each contract is appropriate by determining which projects are or are not considered long term (longer than one year). Most contractors use the percentage-of-completion method for long-term contracts. However, many exceptions exist. For example, residential builders generally qualify to use a different tax reporting method. The definition of a residential contractor is not just a home builder. In addition, under the Tax Cuts & Jobs Act of 2017 (TCJA), tax accounting methods previously available only to smaller contractors can generally be used by contractors with average annual gross receipts of up to $26 million (as adjusted for inflation). Choosing the appropriate method for each contract to reduce tax costs is a tool that is often overlooked, and each contract could have a different method of reporting for income tax purposes.

Determine whether your business qualifies for a research and development tax credit

If new processes to improve efficiency or reduce or eliminate uncertainty are developed in the U.S., contractors may qualify for a research and development (R&D) tax credit. An R&D tax credit is generally taken on a dollar-for-dollar basis on the entire qualified project or the portion that meets the IRS’s criteria. If the R&D tax credit is not fully utilized, it may be carried back to the previous year and forward for 20 years. In addition, qualified startups and small businesses that may not have an income tax liability can offset payroll taxes with the R&D tax credit.

Take the energy-efficient building deduction

The Consolidated Appropriations Act of 2021 made the Energy Efficient Building Deduction (Section 179D) permanent. Business owners and government contractors can take a deduction for energy-efficient improvements to commercial and government buildings. A tax deduction of $1.80 per square foot is available to new or existing building owners who install interior lighting, building envelope, heating, cooling, ventilation or hot water systems that reduce energy and power costs by 50 percent or more. Any accrued tax deductions from these buildings can be carried back two tax years or forward for up to 20 years. Eligible designers and builders (such as architects, engineers, contractors, environmental consultants and energy service providers) can also qualify for 179D under a special rule for public property.

Maximize the Employee Retention Credit

The Employee Retention Credit is a refundable tax credit against certain employment taxes. The credit reduces the employer’s share of Social Security and Medicare taxes. The credit can be in excess of the employer’s share of these taxes, which adds to the contractor’s refund. Employer-paid health insurance costs may also be eligible, even if the employer has furloughed workers and is not otherwise paying wages.

Monitor contractual provisions

It is important to know that contract provisions could impact the tax reporting requirements. For example, a unit price contract or gross maximum price contract has a different tax provision than a lump sum contract. Contract provisions that provide pay if paid or paid when paid carry different tax reporting methods. The retainage provision affects tax reporting as well. Therefore, it is paramount that contractors genuinely understand that their contract provisions could provide them with tax opportunities or create tax obstacles.      

Take advantage of bonus depreciation changes

The Coronavirus Aid, Relief and Economic Security Act includes a technical correction to the TCJA that permits 100 percent bonus depreciation for eligible Qualified Improvement Property (QIP) placed in service after Dec. 31, 2017 and before Jan. 1, 2023. As a result, taxpayers who placed eligible QIP in service from 2018 through 2022 may be eligible to claim 100 percent bonus depreciation. However, this deduction is limited to 80 percent of the cost of the property for 2023. REITs, manufacturers and other businesses that own certain nonresidential real estate improvements on leased land may also be eligible. This can help businesses improve cash flow, especially in the retail, restaurant and hospitality industries.

State tax credits/programs

Working with an adviser familiar with the industry will help ensure that you maximize not only the federal credits available but also the available state credits and programs. For example, many states are focusing on environmental issues and green energy credits and incentives.

Taking a strategic, holistic approach to tax planning can provide many long-term benefits for your business. An adviser who knows your industry intimately will be able to provide guidance on the cost-benefit for all the strategies mentioned above. In addition, once you find a trusted adviser, you can develop your growth plan to ensure company success for years to come.

The material provided in this article is solely for informational purposes and should not be relied upon for tax or accounting advice. Please consult your tax adviser regarding your situation.