A recent analysis revealed that federal tax rates for construction firms were among the lowest with respect to literally any other sector. A collective of only 16.8% on US profits were paid by the largest 19 firms of this particular sector in the year 2020.
Of the forms mentioned above, 12 or rather the 2/3 of the companies paid even lower than the statutory rate.
These firms tool leverage of some provisions to reduce their taxes, 4 of the most important have be elucidated below.
1. Stock compensation
Of the 12 companies in Construction Dive’s analysis that paid less than the statutory corporate rate in 2020, nearly all of them took advantage of writing off stock-based compensation to employees.
This usually involves companies granting executives stock options — the right to purchase shares at a fixed price in the future.
For example, a company could give an executive the right to purchase 1 million shares of stock at $10 each, for a period of 10 years. If the firm’s stock price is trading at $50 when the executive exercises that right, the company can write down the full value of those shares — $50 million — on its taxes.
2. Loss carryforwards and carrybacks
Another tax break that can help lower what a firm owes the government is the net loss carryforward. That allows companies to use an excess past loss, when they owed little or nothing in taxes, in a future year when they make money and may owe more. Such losses can be carried forward indefinitely.
For example, Ron Ballschmiede, chief financial officer at The Woodlands, Texas-based Sterling Construction Co., explained in an email how the firm applied losses from as long ago as 2011 to offset profits now in order to get its effective federal tax rate down to zero in 2020, the second year in a row it did so.
3. 179D Energy Efficiency Deduction
Another deduction particularly applicable to construction companies is the 179D incentive, which allows eligible builders to claim a tax deduction of up to $1.80 per foot for installing qualifying energy-efficient systems in buildings. First established in 2006, it was recently made a permanent program as part of the Consolidated Appropriations Act of 2021 signed into law on December 27, 2020.
Jacobs took a $7.3 million deduction under the rule, while Comfort Systems USA claimed $1.1 million.
4. 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.”