During the COVID-19 pandemic, Denver construction companies have faced a variety of challenges. Similar to other businesses, the need for working capital to offset the economic shock of the pandemic was a prime concern. As funding was received the focus shifted to managing projects, including those scheduled to start and managing ones that were delayed or outright canceled. As the pandemic has progressed, new concerns have centered on workplace safety. It was recently reported that at one construction site a COVID-19 outbreak occurred impacting 26 workers and similar stories have emerged from across the front range. The increased focus on managing these issues has left little time to approach tax planning. Although it may seem like a secondary concern, there are many valuable tax-saving opportunities available in 2020. To help clients, prospects, and others, Hanson & Co has provided a summary of incentives below.
Net Operating Loss Carryback Rules
One of the most beneficial elements of the CARES Act were the changes to Net Operating Loss (NOL) carryback rules. NOL is not a new tax strategy; the ability to use current year losses to offset gains in another year has been a useful tax planning tool for many years. However, NOL opportunities were significantly limited by changes made in the Tax Cuts and Jobs Act. It restricted the use of NOL to a lookback period of two years and a limit of 80 percent of adjusted taxable income, with a 20-year carryforward. The CARES Act changed these restrictions to allow a carryback of current year losses for up to five years. This means that construction companies experiencing losses in 2020 can carry them back as far as 2015; the same applies for losses in 2018 or 2019. Further, the CARES Act temporarily allows businesses to claim up to 100 percent of adjusted taxable income.
A more immediate refund may be available by filing amended returns for 2018 or 2019 now. The time and expense to do so could be worth it since it could generate significant refunds for more than one year. Companies will need to check whether any of the lookback years were also subject to foreign earned income and if so, they can exclude those years from NOL.
Section 179 Deduction and Bonus Depreciation
Though not related to the CARES Act, the Section 179 deduction has been a popular tax strategy for years. It allows businesses to recoup some or all of the costs of capital expenses through a deduction. New or used equipment purchases and software generally qualify. In 2020, the deduction limit is $1,040,000 and the spending cap is between $2,590,000 and $3,630,000, after which point Section 179 no longer applies.
Bonus depreciation, which can be used after the Section 179 limit is reached, essentially enables the opportunity to write off the full purchase price of new and used equipment. In 2020, bonus depreciation is 100 percent. In addition, the CARES Act fixed a known error in the tax code that disallowed interior building improvements from taking bonus depreciation. The error, known as Qualified Improvement Property (QIP), viewed interior building improvements as 39-year property instead of 15 years. The change was made retroactive to 2018 and 2019, so amending prior year returns may offer additional cash flow.
Tax Refund for Disaster Losses
Construction firms that sustained losses related to COVID-19 – a federally declared disaster – may be able to use IRC Sec. 165 to claim a tax deduction for the losses. It is not specific to COVID-19 and most of the time, this tax deduction is used for natural disasters like hurricanes or earthquakes. To make the deduction, file Form 4684 on the annual tax return.
COVID-19 Tax Opportunities
Legislation related to COVID-19 created more ways to save through tax credits and tax deferrals. First, all businesses can delay depositing 50% of payroll taxes for 2020 until December 31, 2021, and December 31, 2022.
In addition, there are two tax credits available for construction companies impacted by COVID-19. One is a tax credit to reimburse the employer for paid leave when a worker is off sick due to coronavirus. This is through the Families First Coronavirus Response Act and can be used in conjunction with PPP loan funds. The other is a tax credit for maintaining payroll, called the Employee Retention Credit. It is important to note, the Employee Retention Credit cannot be used at the same time as PPP loan funds.
Other Standard Tax Deductions
Construction companies regularly engage in activities that result in opportunities for deductions. Whether it is purchasing supplies and equipment or expenses that arise as part of normal operations, several areas qualify. These include:
- Utilities such as phone and internet, especially when working from a home office
- Advertising and legal costs
- Continuing education
- Subscription fees to relevant industry publications
- PPE and other supplies such as stationery, office furniture, tools, and more
In the months following the COVID-19 outbreak, Denver construction firms will be facing an uncertain economy and the probability of delayed or cancelled jobs. Tax planning is smart during any year, and right now, it is more important than ever to be strategic in how tax credits and deductions can save money and conserve cash flow. If you have questions about the information outlined above or need assistance with a tax or audit issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.