Your construction company probably has its operations and administration pretty well figured out by now. But tax planning? Maybe not. The fact is that many construction companies aren’t engaging in strategic tax planning, and they’re missing out on thousands of dollars, at least, each year.
Strategic tax planning for construction companies breaks down to the following:
- Using every available tax credit and deduction
- Tax planning throughout the year, not just during tax season.
- Managing cash flow and using accounting methods to increase tax savings
If you do that, you can reduce your tax liabilities, improve your cash flow, and have a more efficient, compliant business. Now, let’s talk specifics.
Maximize your tax credits and deductions.
Here’s the big one. The single best way for your construction company to have successful tax planning is by using every tax credit and deduction available to you.
The five I want to focus on are:
- 45L Tax Credits
- Section 179D Deductions
- Exemption for Section 163(j) limits
- Fuel Tax Credits
- Work Opportunity Tax Credits
Several tax benefits specifically apply to the industry. Others are more general and apply to different kinds of businesses.
45L tax credits give you money for energy-efficient homes.
Here’s a tax credit that specifically applies to those in the construction industry. The 45L tax credit offers as much as $5,000 per dwelling unit to builders who construct energy-efficient homes.¹
The specific amount of the credit varies based on factors like home type and number of stories, but qualifying businesses get, at minimum, $2,500. For a 10-unit development, you’re looking at tax credits totaling up to $50,000.
To qualify, you must meet a few energy standards.
Exact standards will depend on the dwelling’s location, but include factors like insulation and energy-efficient appliances. Eligible developers need certification from a qualified third-party verifier. RESNET-HERS Raters and Energy Star are two of the most common.
45L tax credits can also be paired with our next item on the list, the Section 179D deduction.
Section 179D deductions reward energy-efficient design and construction.
This is another tax benefit for energy-efficient construction. Most construction companies are eligible for section 179D deductions, but there are additional benefits to companies that use energy-efficient building practices.
- $0.50 per square foot for a building with 25% energy savings
- Plus $0.02 per square foot for each percentage point of energy savings above 25%
- Up to a maximum of $1.00 per square foot for a building with 50% energy savings.²
Even better: If your business meets the Prevailing Wage and Apprenticeship Requirements, you can get five times that, or a $5 per square foot deduction.
There are three differences between the section 179D deduction and the 45L tax credit.
Take a close look at the differences, and start thinking about whether these differences are applicable to your business.
- Section 179D is a deduction. It reduces your taxable income, whereas the 45L tax credit is a dollar amount you subtract from your taxes owed.
- Section 179D applies to building owners and architects, not just the construction company that makes the improvements
- Section 179D covers commercial and large multi-family buildings.
A note here: As with the 45L credit, you’ll need to meet energy certification standards to get the benefit.
Small construction companies can ignore section 163(j) business interest limits.
Most construction companies can only deduct business interest expense up to 30% of their adjusted taxable income. But that’s not true for small construction companies (annual gross receipts under $29 million).³
If you fit that bill, you can ignore the section 163(j) limits altogether and deduct 100% of the interest you pay on loans and financing.
You earned fuel tax credits. Now claim them.
Your construction company probably already uses off-highway vehicles and equipment. Excavators, bulldozers, and generators all qualify. The IRS allows businesses to claim a fuel tax credit for the use of these vehicles and equipment used at job sites.⁴
One important point if you’re going to claim a fuel tax credit: record everything. Keep a record of your fuel usage so you can be sure you’re being accurate.
Take advantage of the WOTC.
The Work Opportunity Tax Credit (WOTC) offers a dollar-for-dollar tax reduction if you hire workers from groups like veterans and long-term unemployed workers.
Most qualifying workers give you a tax credit of $2,400, but it goes as high as $9,600 for qualified veterans.⁵
The WOTC is a great way to reduce your payroll cost while continuing to hire. Take advantage.
Manage your cash flow through strategic accounting.
Cash flow is one of the biggest challenges for construction companies. You’ve got high upfront costs and payment delays that present unique challenges for your industry.
Tax planning for construction companies means working with those cash flow issues to preserve your funds and minimize tax obligations.
Choose the right accounting method. Switch if necessary.
Construction firms usually choose between two accounting methods:
- Cash basis accounting
- Accrual accounting
Use cash accounting for flexibility.
Cash accounting means recording income when you receive payment. If your business wants more control over cash flow, cash accounting is probably the better choice.
Use accrual accounting as your business grows.
With the accrual method, you record income when it’s earned and expenses when they’re incurred. It’s better for construction companies that deal with larger contracts and need more of a long-term financial picture.
It’s not always clear which approach is best for your specific situation, so you’ll want to talk to a tax professional for help.
Delay income and accelerate expenses.
If you use cash accounting, you can delay your income to shift tax obligations to the next year. You can delay income either by holding off on invoicing until after Jan. 1 or by paying outstanding bills before the end of the year.
Delaying income can save you thousands each year in taxes, but it’s important to be careful. Don’t create a cash flow problem by deferring too much income.
Speed up depreciation with a cost segregation study.
Cost segregation lets construction companies write off certain parts of a building faster instead of spreading the cost over 27.5 or 39 years (standard depreciation periods for residential properties and commercial buildings, respectively).
Items like flooring, lighting, and landscaping can be deducted in 5, 7, or 15 years, reducing your taxes sooner.
Tax planning is an ongoing concern.
Tax planning isn’t a once-a-year consideration. You need to stay on top of your tax situation year-round.
Plan with early tax projections.
Try to complete your tax projections by early November. That way, you’ll have time to make informed financial decisions throughout November and December and will avoid any end-of-year surprises.
Partner with a tax professional.
Construction tax planning is complicated. Work with a CPA or knowledgeable tax advisor who can help you strategize long-term while finding the tax savings you need to grow.
You can grow your construction company. Start today.
Tax credits and deductions. Strategic accounting. Year-round tax planning. These aren’t suggestions; they’re necessities for a successful construction company. Schedule a discovery call to start planning for tax-efficient growth.
Talk soon,
Jeremy A. Johnson, CPA
References
- U.S. Department of Energy. Section 45L Tax Credits for Zero Energy Ready Homes. Washington, D.C.: U.S. Department of Energy; 2023. Available from: https://www.energy.gov/eere/buildings/section-45l-tax-credits-zero-energy-ready-homes
- Internal Revenue Service. Energy efficient commercial buildings deduction. Washington, D.C.: Internal Revenue Service; 2025 Jan. Available from: https://www.irs.gov/credits-deductions/energy-efficient-commercial-buildings-deduction
- Internal Revenue Service. Threshold for the gross receipts test increased to $29 million for 2023. 2025. Available from: https://www.irs.gov/about-irs/threshold-for-the-gross-receipts-test-increased-to-29-million-for-2023
- Internal Revenue Service. Fuel tax credit. 2025. Available from: https://www.irs.gov/credits-deductions/businesses/fuel-tax-credit#types
- Internal Revenue Service. Work Opportunity Tax Credit. 2025. Available from: https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit