With the rigors of physical labor and the headaches of compliance regulations, most construction workers would appreciate a break after a long day on the site. Unfortunately, we can’t help lighten your material load. We can, however, ease your tax burden.
Lots of construction workers are classified as independent contractors and thus are seen as self-employed professionals. If this describes you, then you don’t have taxes withheld from your paycheck like a traditional employee. While this means more of the tax-prep burden falls on you, it also means you can claim deductions against business-related expenses. Deductions help you lower your tax burden and keep more money.
When it comes time to file, you’ll list the majority of your tax deductions in Part II of your Schedule C (IRS Form 1040). If you have less than $5,000 in claims, you may be able to use Schedule C-EZ. Whichever you choose, both are due April 15 along with your annual tax return. If your business is registered as a sole proprietorship or single-member LLC, then you also need to fill out the Schedule C.
(NOTE: If April 15 falls on a weekend or holiday, it is observed the following Monday or Tuesday. In 2018, this means your taxes aren’t due until April 17.)
Transportation Expenses (Line 9)
When you’re deducting transportation costs, you can’t deduct the commute between your home and the jobsite. You can, however, deduct trips between multiple job sites, as well as those made for business-related trips throughout the day (e.g. traveling to get supplies or attending meetings off-site).
You also have to choose between two methods of tax deduction: the actual expenses method or the standard mileage method.
Method 1: The Standard Mileage Rate
Because there are so many expenses to account for when it comes to using a car for business, the IRS consolidated the most common of them into one single rate per mile. The standard mileage method is by far the simplest method. To calculate your deduction, multiply the total number of miles used for business by the rate set by the IRS for the tax year ($0.535 per mile for 2017). This figure is meant to reflect each of the following expenses:
- Gasoline
- Lease payments
- Insurance
- Maintenance and repairs (e.g. oil, tires, etc.)
- Vehicle registration
- Depreciation
Because the IRS bundles these expenses into one standard mileage rate, it won’t allow you to deduct them piecemeal should you choose this method. That being said, here’s an example of how you would use the standard mileage method to claim a deduction:
You drove 14,000 miles for the year. Excluding your home commute, 7,000 of those miles were driven between multiple construction sites and supply runs. Since you can only deduct the business use of your car, you can only deduct the rate based on those business-oriented 7,000 miles. That would be 7,000 x 57.5¢, which equals $4,025.00.
An important note: If you’ve used the actual costs method (see below) for this car in a previous tax year, you are not allowed to switch back to the standard mileage method. There are also a few other cases where you cannot use it: If you aren’t the owner or lessee of the car, or if you use five or more cars at the same time.
Method 2: The Actual Costs Method
The actual cost method entails deducting each and every business-related car expense by itself. This includes gasoline, insurance, maintenance, depreciation, lease payments and more.
Claiming actual costs requires solid record keeping and holding onto receipts. You can do this manually with pens and papers, or automatically track and categorize expenses with accounting software like QuickBooks.
Some expenses, such as gas and maintenance, are relatively easy to track as long as you hold on to your receipts. Other actual costs, such as depreciation, can become quite complicated. Here’s an example of how you figure out depreciation for a $10,000 vehicle:
You buy a $20,000 car (congratulations!). You realize that your car won’t provide all its value in the first year, because you plan to own it for more than a year. Since it provides you value for the entire time you own it, you must manually account for that value over time.
That’s depreciation. There are many ways calculate an asset’s depreciation, but the easiest way—and the one preferred by the IRS—is by using the “straight-line method.” This is the total cost divided by the number of years (maximum of seven years from the point the car has been put into service).
If you depreciate a $20,000 car over seven years (the maximum number of years allowed), that’s $20,000 / 7 = $2,857 per year depreciation expense. Keep in mind, however, that you can only deduct the business-related portion of the depreciation expense. If you used the aforementioned car for business 60% of the time, then you can only deduct 60% of $2,857, or $1,714.
There are other things to keep in mind when using the actual expenses method. Should you decide to claim depreciation, the vehicle will also have to meet weight and type requirements. On top of that, once you use the actual costs method, you will not be allowed to use the standard mileage rate for any following year.
If this sounds confusing, that’s because it is. That’s why most people decide to use the standard mileage method.
Parking and Tolls
If your business meetings or supply runs require you to pay for parking or a toll, those expenses can be claimed as tax deductions. For example, if your local hardware store doesn’t validate parking while you’re picking up supplies, you can deduct that parking expense. You can also deduct tolls on roads and bridges.
Be aware, however, that if you’re taking a break for lunch, you cannot expense the parking, as it is not business-related.
Public Transportation
If you use municipal bus or rail to get around, then those expenses are also deductible. But, just as with car-based deductions, you cannot claim either leg of your commute to or from home.
Deductible Costs of Doing Business
Advertising (Line 8)
You can deduct any materials you use to market your business. This includes not only the flyers, branded promotional items themselves, but also the cost of hiring someone to design and make them for you.
Just remember that “advertising” doesn’t apply to things like business gifts, holiday party fare or anything that isn’t branded.
Business Insurance (Line 15)
The cost of insurance premiums related to running your business is entirely deductible. This can include contractor general liability insurance, property insurance and others.
This doesn’t, however, include your personal health, auto or disability insurance.
Contract Labor (Line 11)
If you made payments to any subcontractors who have worked with you on a job, those payments are deductible.
Note that those contractors, unless they’re employees, will be seen as “independent contractors” for tax purposes. Employees have their own deduction, which is listed in the “Wages” section below.
Health Insurance Deduction (Line 29 of IRS Form 1040)
You can deduct the costs of your personal health insurance premiums as a self-employed person as long as you meet certain criteria:
- Your business is claiming a profit. If your business claims a loss for the tax year, you can’t claim this deduction.
- You were not eligible to enroll in an employer’s health plan. This also includes your spouse’s plan. If you were eligible to enroll in one and chose not to, you cannot claim this deduction.
- You can only claim premiums paid for the months when you were not eligible for an employer’s health plan.
Legal/Professional Services (Line 17)
Professional fees incurred by attorneys, tax preparers, accountants or other professionals can be deducted.
This deduction does not apply, however, to any employees that perform these services for you. They should be included under “Wages.”
Meals for Travel and Entertainment (Lines 24a and 24b, respectively)
Meal deductions can be made either within the context of business travel or for entertaining a client. When traveling for business, you can deduct up to 50% of the meal expense, which includes sales tax and gratuity.
If you’re deducting meals as part of entertaining a client, you can still only deduct up to 50% of the cost. In order for the meal to be eligible for a deduction, it must be consumed with at least one client, and the meeting must include business either directly before, during or after the meal is consumed.
Self-Employed Contributions Act (SECA) Tax Deduction (Line 27 on IRS Form 1040)
Whereas traditional employees have their FICA taxes split between themselves and their employers, self-employed professionals are responsible for paying their own share of those Social Security and Medicare contributions, which are known as SECA.
Self-employed workers can claim a SECA deduction on Line 27 of Form 1040. You will compute this amount as part of Schedule SE.
Supplies and Equipment (Line 22)
Any costs for normal replaceable supplies that you use in the course of your work can be deducted. For construction workers and contractors, this can include things like cleaning supplies, but not the materials used as part of actual construction.
Equipment can also be written off if it is solely used for business purposes. This can include saws, hammers and more.
Taxes/Licenses (Line 23)
Business taxes (e.g. your share of FICA if you have employees) can be deducted. Perhaps even more relevant, however, is that the various licensing fees you pay can also be deducted.
Note that self-employment taxes, however, are not deductible here.
Wages (Line 26)
Employees’ wages can also be deducted. This includes any salaries, commissions or bonuses.
This does not apply to any employee benefits you provide your employees, which can be deducted separately on Line 14. It also does not apply to any salary you pay yourself.
Being detail-oriented today can save you from a lot of headaches tomorrow. When it comes to claiming deductions, it’s essential to have all of your expenses recorded, especially when it comes to a potential audit. QuickBooks can track and organize your expenses throughout the year, so you can save yourself some time and focus your attention where it’s needed most.
If you’re doing all of this for the first time, it’s always easier with the help of an accountant. Find one near you and have them help you find all the deductions you’re entitled to come tax time.
Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa works with small business owners and entrepreneurs to assist them with financial management and creating organized systems and procedures. She specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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