5 strategies construction firms use to lower their taxes
From depreciation and carrying forward losses to research and development credits , public contractors rely on an array of tactics to help minimize tax bills .
recent Construction Dive analysis revealed that public construction firms ’ effective federal tax rates are among the lowest of any sector . The 19 largest profitable firms in the industry paid a collective 16.8 % on their U . S . profits in federal taxes in 2020 , a fifth lower than the 21 % statutory rate set by Congress .
Of those , 12 — or nearly two-thirds — paid less than the statutory rate .
These construction firms relied on several provisions to reduce their tax liability , all of which are completely legal . Here is a look at the top techniques they used :
1 . Depreciation on assets
The intensive capital investments construction companies make are one of the main avenues that result in lower taxes for these firms , according to Andrew Kahn , a certified public accountant who specializes in construction finances at Bethlehem , Pennsylvania-based advisory firm Concannon Miller .
“ The reason their effective rate is lower than 21 % is due to the favorable depreciation write-off provisions ,” Kahn said . “ So if you ’ ve got a construction company and you add $ 5 million in new assets — say by buying machinery , equipment and vehicles — those assets get written off .”
While specific expenses aren ’ t usually included in a public company ’ s 10-K filing , a clue to using the depreciation writeoff can be found in the deferred income tax expense section of these annual reports . The section lists what a company thinks it may owe in the future , based on actions it has taken in the current year .
So , if a company writes off the expense of an earth mover for tax purposes in the current year , but then recovers some of that expense when it sells it down the road , the difference between the two numbers falls into the deferred tax category .
For example , construction and engineering firm Jacobs reported $ 53.5 million in federal deferred tax expenses for 2020 , a figure that ’ s just below the $ 55.3 million it reported for all of its tax obligations at the federal , state and foreign levels .
“ The amount of federal income tax liability that the company was able to postpone
12 DITCHMEN • JULY 2021