Ensuring accurate construction taxes: A guide for builders

It’s crucial for builders to maintain good financial health for their business. Still, it can seem as though the odds are stacked against you. Volatile supply chains, rising costs to build and varying accounting methods can all make staying in the black difficult. Add into the mix the complexities of tax compliance, and it may seem downright impossible. 

That’s why it’s important to explore steps that ensure accurate construction taxes. Along the way, learn how to recognize challenges that might come up and how you might avoid any regulatory mistakes. From this knowledge, gain valuable insights to help your construction business navigate the tax effectively.

How are construction companies taxed?

Tax obligations for construction companies can vary depending on business structure and the tax laws in their jurisdiction.

In most cases, construction companies are taxed in these areas: income tax, self-employment tax (if applicable), payroll taxes for employees, property taxes and sales tax on materials and services.

Income, self-employment and payroll tax: What you need to know

Properly managing income tax, self-employment tax (if applicable) and payroll tax is crucial for construction companies for several reasons. Compliance with tax regulations ensures legal and ethical operations, avoiding potential penalties, fines or legal repercussions. Accurate tax management also allows construction businesses to effectively allocate resources, plan budgets and make informed financial decisions.

• Income tax: Construction companies are typically subject to income tax on their net profits. The income tax can vary based on location and the legal structure of the business. For example, if a construction company operates as a corporation, it’s subject to corporate income tax on its profits. Sole proprietors, on the other hand, report business income on their personal tax returns. Then, the income is taxed at an individual rate.
• Self-employment tax: If you are a sole proprietor – a relatively common legal structure for residential construction companies – you may also be subject to self-employment tax. This is designed to cover Social Security and Medicare for self-employed individuals and is in addition to any income tax obligations.
• Payroll tax: If your construction company has employees, you’re responsible for prepping, withholding and remitting payroll taxes on their behalf. These taxes are deducted from employee wages and must be paid to the appropriate tax authorities on a regular basis.

What about construction sales tax?

Construction sales tax is an important consideration for construction companies, especially when it comes to the sale of construction materials and services.

As is the case with other kinds of taxes, sales tax laws and regulations can vary, so it’s important for you to understand and comply with the specific requirements of your operating area. In general, though, construction sales tax is imposed on the purchase and use of construction materials, subcontracted services and other taxable transactions related to construction projects.

Understanding property taxes on new construction

Property taxes play a significant role in the financial considerations of a construction company. But calculating property taxes accurately can be challenging. That’s because there are complex factors influencing each tax assessment, such as the value of the property, its location and local tax laws. As a construction business, you may build two identical homes in two different subdivisions, and each property might have vastly different property tax assessments.

Because property taxes are recurring expenses that may directly affect the profitability and cash flow of a construction project – and because you could face penalties by underpaying or overlooking necessary taxes – it’s important for taxes to be accurately calculated.

Remember, tax estimation for new construction projects can vary depending on local regulations and specific project details. For example, certain jurisdictions may offer tax incentives for new construction projects, especially when building in areas that help promote economic development. Be sure to conduct thorough research and consult with local authorities and your own tax experts to ensure the most accurate tax assessment for your project.  

Tax write-offs for construction costs

While identifying qualifying construction costs can be tricky, in some instances they can be used as a write-off for a construction company if they are considered ordinary and necessary for business operations. Here are a few examples:

Qualifying tax write-offs for construction

• Construction materials and overhead costs: Lumber, concrete and wages paid to construction workers are all examples of generally deductible costs. In some cases, though – such as purchasing big-ticket equipment and machinery items – expenses may need to be capitalized and depreciated over time, instead of being immediately deducted.
• Depreciation of equipment and expenses: Since these assets have a value that decreases over time, the depreciation deduction process reduces the taxable income accordingly.
• Indirect construction expenses: This may include costs such as permits, licenses or professional fees.
• Qualified business expenses: Examples that can fall into this category include office rent, utilities and insurance premiums.

Non-qualifying tax write-offs for construction

• Personal expenses: Personal purchases unrelated to the construction project are generally not deductible.
• Capital improvements: While construction costs may be deductible, major capital improvements – such as a new HVAC system or roof – are typically not fully deductible – at least in the year incurred. As stated above, these must be capitalized and depreciated over time.
• Fines and penalties: Any kind of cost incurred due to noncompliance with laws or regulations is generally not deductible.
• Owner’s labor: If you provide labor as a business owner, the value of your labor is not generally deductible. This is important to note especially in times of labor shortages, where business owners have been known to step in and deliver services to keep projects on track.
• Personal use expenses: If you use equipment for personal purposes – even if they are business assets – only the portion of usage directly related to the business may be deducted.

Construction tax tips and strategies for accurate tax management

Accurate tax management and remittance plays a significant role in the financial well-being of your construction company. In addition to supporting regulatory compliance, it helps construction companies optimize financial operations, make informed business decisions and ensure proper allocation of resources.

To help ensure the accuracy of your construction tax management, consider these steps:

1. Maintain accurate financial records

Keep detailed and up-to-date financial records. This should include income, expenses, invoices, receipts and other relevant documents. Construction accounting software and financial management tools can help streamline the recordkeeping process.

2. Separate business and personal finances

Maintain separate bank accounts and credit cards for your business to make sure you’re clearly separating personal and business finances. Have clear processes defined for tracking equipment that might be used for both purposes, like company trucks. That way, you can keep all transactions, deductions and taxable figures on the appropriate tax record.

3. Understand tax obligations

Tax obligations are complicated. It’s important to research and stay updated on tax laws, regulations and filing requirements – especially as they are known to change. Consider consulting with a tax professional who specializes in construction to ensure compliance and maximize deductions.

4. Deduct qualified business expenses

Identify and deduct eligible business expenses such as construction materials, labor costs, subcontractor payments, permits, licenses and other expenses associated with your construction projects. Remember, the more detailed you are in keeping records of these items, the easier it is to support these deduction claims during filing. Use document management software to store this kind of information securely alongside other project information.

5. Track and remit sales tax

Construction businesses may have sales tax obligations on materials and services provided. Depending on your local jurisdictions, these taxations can be included on client invoices. Ensure you’re accurately tracking tax on invoices and other documentation.

6. Regularly review and update

Regularly review your tax strategy and financial records to ensure you’re doing everything you should be for your construction tax management. As regulations can change often and vary based on location, consider consulting qualified tax professionals.

Building better financials with Buildertrend

Construction financial management is complicated, especially when considering the different kinds of taxes, regulations and requirements your business must comply with.

By ensuring the building blocks of your financial management practices are steady, you can ensure you’re always paying accurate taxes based on what you actually earn – and spend. By incorporating tax calculations directly into invoicing features, businesses can automate the tax calculation process, minimizing the risk of errors or miscalculations. And when the process is integrated with accounting software like QuickBooks, you can help ensure all invoicing and payment information, including tax details, are accurately recorded for a comprehensive view of your company’s financials.

Learn more about Buildertrend’s financial management system for construction companies today.