Long-term Tax Planning for Your Construction Biz

Management needs to spend time with tax experts to understand what their tax position was for the past year, how it looks for the current year, and to see what is on the horizon for the following year.

Everyone will likely pay more in taxes. How much more, and how prepared you are, is up to you.
Everyone will likely pay more in taxes. How much more, and how prepared you are, is up to you.
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Is there ever not a “TAX TIME” in the U.S.? I don’t think so. And I believe “TAX TIME” is going to increase dramatically.

The PROBLEM being that the U.S. continues to spend more than it takes in, which we all know does not work in any way, shape or form. And how do we fix this? By taking more money from you and your company. THERE IS NOT A CHANCE IN HELL THAT THIS WILL NOT HAPPEN, because in four years, U.S. debt will be about $40 trillion, carrying $1.2 trillion of interest cost (at 3%) and $1.6 trillion (at 4%). At the same time, the annual debt to gross domestic product (GDP) ratio we are talking about exceeds 100%. The estimates for 2023 are $4,439 trillion of tax revenues against outlays of $6,134 trillion of spending, with the debt balance growing yearly without a game plan to reverse the situation. It will take both higher revenues and spending cuts to reduce the deficit, considering that a large portion of spending is fixed (Social Security, Medicare, health benefits and interest expenses, which all together add up to approximately $4 trillion of outlays. Not a pretty picture. No matter how you look at our situation, revenues need to increase, and outlays reduced to lower the total debt.

I have suggested on many occasions that management spend time with their tax folks to fully understand what their tax position was for the past year, how it looks for the current year, planning for the current year with enough time to execute “tax” programs and to see what is on the horizon for the following year. I hope you have been doing this. If you followed this suggestion you should have a pretty good feel for your tax position and the impact on that tax position should Congress take steps to increase all the forms of taxes you pay related to payroll, company taxable income and personal income.

We find ourselves currently working with the 2017 TAX CUT and JOBS ACT that will expire in 2025. So, to start with, let’s assume this act will be repealed. As a reminder of what the tax cut act provided, here is a brief list of the benefits:

  • Lower tax rates
  • Higher standard deduction
  • Estate and gift tax exemptions
  • Bonus depreciation
  • A reduced deduction for mortgage interest and state taxes      

Suggestions for raising revenue are as follows:

  • Repeal the 2017 Tax Cut Act
  • Raise the top income rate to 45%
  • Apply the 12.4% Social Security tax on incomes over $250,000
  • Payroll taxes to cover all pass-through income
  • Raise total payroll taxes by 1%
  • Reduce estate tax exemption from $12.9 to $3.9 million
  • Raise corporate tax rate from 21% to 28%
  • Capital gains and dividends taxed at ordinary rates
  • Tax unrealized capital gains at death with a $4 million exemption
  • Wealth tax of 2% for net worth over $50 million and 3% for over $1 billion
  • Further limiting or eliminating deductions
  • A 5% value added tax
  • Limit charitable donation deductions
  • 4% on share buybacks
  • Entitlement Program Reform: later access and higher cost
  • 15-cent gas tax

The income tax changes will only apply to those making over some set amount, with lower income tax brackets excluded.

Cost reductions are not part of this list.

Some of you may be wondering why Bartecki is talking about tax exposure 15-20 months out. I did this because the changes are significant and because it may take you a year+ to get your potential tax situation under control. Maybe the ESOP plan sounds better now? Should you gift your wealth to family members via a trust now, instead of waiting for probate to do so? Should you accelerate your technology plan to reduce labor costs? Could a life insurance policy help with lowering tax costs? So many options to consider; so easy to make a mistake. But no matter what, there will be a substantial increase in tax costs for both the company and shareholders.

Another situation to consider is the expected company cash flow under current conditions. Could you handle a substantial increase in tax spend? Do you know what your free cash flow position will be for 2024 and 2025? With changes in pricing and interest rates, it may wind up lower than what you are generating now.

What would I do?

  • If I am in the “sell” range I would look at selling in 2024 or 2025, understanding that at current interest rates the price may be lower than you like.
  • If I am not in the “sell” range and the company is highly profitable, then the ESOP should be reviewed.
  • If I have a substantial estate, I will investigate how to avoid any increase in the estate tax or the wealth tax (with ESOP, you do not own the company).
  • I would investigate employment benefit plans to find out options for the Roth or IRA.
  • I would find a tax attorney who knows how to use trusts to accomplish reduction of estate value and potential income taxes.
  • I would investigate how to channel transactions through various entities or states to reduce tax.

The bottom line here is, we all will pay more; how much more is up to you. There is no doubt that rates will increase, deductions eliminated, a VAT tax added and wealth taxes in the form of taxable dividends and capital gains and well as a net-worth tax. I would also assume that deductions for IRAs and 401Ks will be limited.

Every time Congress makes these changes, companies and individuals get caught with their guard down and pay a heavy price going forward. But you now have a jump start on the situation, especially where the high-priced changes are involved. What works here is you can plan, but you don’t have to execute until you are ready.

Happy New Year!