Year End Tax Planning Checklist: Three Tips for Improving Efficiency and Tax Savings

Don’t be fooled by the name, year-end tax planning shouldn’t be left for the final months of the year, nor is it necessarily finished as the clock strikes midnight on New Year’s. With the scope of the tax issues (and money) at stake, and the complexity of the business considerations involved, effective tax planning begins well before Q4 and can continue into the new year.

The following three checklist items should help you better organize your future tax planning initiatives and focus your efforts where they may have the greatest impact.

Checklist Item 1: Know Your Deadlines

To make the most efficient use of the hours you’re allocating to year-end tax planning, start by getting familiar with the deadlines you’re facing. Some tax issues will need to be squared away by the fiscal year end, which, for most contractors, is Dec. 31. Still, other tax considerations don’t need to be finalized until you’re filing tax returns months later and may even be subject to the same electable extensions as your returns.

Notably, there are certain tax issues with timelines that are completely unique – pass through entity (“PTE”) tax deadlines, for example, vary widely from state-to-state. Multi-state businesses should take care to research PTE tax deadlines for every state they operate in.

To best organize your tax deadlines, create a spreadsheet with a column for each due date and rows for the items that fall under that deadline, then reference the calendar frequently to record your progress and ensure nothing is slipping through the cracks.

Every business is unique but a few time sensitive tax issues to be aware of include:

• Tax method changes, some of which must be submitted for IRS approval prior to your fiscal year-end (with the exact deadline depending on the nature of your submission);
• Fixed-assets, which, for depreciation and tax credit purposes, need to be placed in service for the year in which depreciation or credit is claimed;
• 179D study and deduction claims, which can be made up to the time of your tax return filing;
• Research and Development (“R&D”) credits, which can be submitted with your tax return; and
• Accrued expenses, which must be paid within 2 and ½ months of the fiscal year end to be deducted on the previous year’s return (however, retirement contributions can be made up to the filing of your return).

Checklist Item 2: Know What’s New

We get it – things change quickly and it’s difficult to stay on top of intricate new tax legislation. Still, not doing so might cause you to leave money on the table.

Recently, the Inflation Reduction Act introduced a major change to the 179D, significantly raising the value of the deduction per square foot of qualifying property (from $1.88/SF to up to $5/SF) and expanding eligibility. Previously, only commercial property owners and designers of government owned buildings were eligible for 179D, but now the credit can also be claimed by REITs, contractors, and designers of nonprofit, religious, tribal, and educational facilities.

The huge increase in bonus value per square foot of qualifying property is turning heads. But the updated 179D includes strict wage and apprenticeship requirements applicants must satisfy to take full advantage. In addition, taxpayers hoping to maximize the value of the credit must demonstrate that their construction or renovation work results in energy savings of at least 25% to 50%.

To add a further layer of complexity, taxpayer should know that the updated wage and apprenticeship requirements don’t apply to projects that began before 1/31/2023. That means that this tax season, there will be a number of taxpayers eligible for higher deductions under the program’s former, more lenient wage and apprenticeship requirements. As ever, the key question is: as the fine print changes, is your business aware of the opportunities available?

Checklist Item 3: Claim Your Credits

It’s an endemic issue in the construction industry that R&D credits are widely underutilized. The changes in the code date back to the Obama/Biden administration, but somehow contractors still haven’t quite caught on – construction companies frequently undertake R&D activities without claiming the credits. If your business is manufacturing components (including mixing asphalt or fabrication of any kind) or undertaking design build projects, you likely qualify for these credits. Furthermore, if your business is developing or augmenting project management or design software, or improving client-facing processes, you should be investigating their eligibility for R&D credits.

Knowing which credits are available is only half the battle – you also need to know how to qualify and apply. There have been a few recent notable changes to the tax credits available, including the following top-line items.

Like the 179D update, the Inflation Reduction Act has upgraded the 45L Efficiency Home Credit from $2,000 per home/unit to $2,500 per Energy Star certified home/unit or $5,000 per Zero Energy Ready certified home/unit. More detail on each certification program’s eligibility requirements is available on the Department of Energy’s website – and, just like 179D, the full value can only be realized if wage requirements are met.

In addition, certain electronic vehicles produced in the U.S. are eligible for tax credits — up to $7,500 for those under 14,000 pounds and $40,000 for those over 14,000.

Conclusion

Hopefully this checklist proves useful in the months ahead and helps you get on track for a 2024 year-end tax planning that is as financially effective as it is efficient.