We’d all like to keep more of our hard-earned money at the end of a financial year. However, tax planning can be complex and tedious for many HVAC contractors. By implementing proactive tax planning strategies, you can prepare for the future and improve your financial position.
HVAC contractors’ best tax planning strategies include maximizing deductions, utilizing refundable tax credits, planning for seasonal fluctuations, utilizing fringe benefits, and optimizing retirement plans. Consult with a tax professional to ensure you stay compliant with the law.
It’s imperative to include tax planning in your financial plan to handle tax liabilities most effectively. Here are National HVAC Brokers’ top tax planning strategies to avoid common pitfalls that cost your company more taxes.
What is Tax Planning
According to W.H. Hoffman, tax planning is the taxpayer’s capacity to arrange his financial activities in such a manner as to suffer a minimum expenditure for taxes.
Tax planning differs from tax preparation, which involves preparing your finances, records, and statements for tax season. In comparison, tax planning involves leveraging effective and legal strategies to reduce your tax burden and save money.
Tax planning utilizes tax credits, deductions, exclusions, concessions, allowances, and rebates to minimize tax liability while staying compliant. Essentially, it’s not about evading taxes but strategically utilizing deductions, credits, and exemptions to your advantage.
Tax Planning Benefits
Tax planning offers many short-term and long-term benefits for HVAC contractors, helping them optimize their tax outcomes and financial management. Here are the top benefits of tax planning:
- Maximizes deductions and write-offs, equaling lower taxes
- Navigates tax exclusions and loopholes
- Improves cash flow
- Reduces tax risk and compliance issues
- Drives profitability
- Optimizes retirement savings
- Allows for more informed business decisions
Implementing actionable tax planning strategies can help HVAC contractors manage their tax liabilities. Ensure you regularly review and update your tax plan in consultation with a tax professional to yield significant benefits.
1. Maximize Deductions and Write-Offs
Effective tax planning allows HVAC contractors to identify and leverage all deductions and write-offs, reducing taxable income and tax liability.
Types of tax deductions and write-offs include the following:
- Vehicle expenses: Contractors can deduct standard mileage rates for business-related travel as well as expenses like gas, repairs, license, insurance, and lease payments.
- Materials and supplies: Deduct costs associated with materials and supplies used in HVAC jobs such as ducts, multimeters, leak detectors, refrigerants, and other consumables. Other supplies costs like office supplies, marketing materials, and software systems can also be deducted.
- Tools and equipment: You can deduct costs for HVAC-related tools and equipment, including HVAC units, hand tools, safety tools, and specialized equipment.
- Depreciation: According to the IRS, contractors can depreciate the cost of their equipment once they use it for more than one year. Write off the depreciation value on your tax return.
- Training and education: Deduct costs for courses, training, and certificates for you and your workers to learn new skills or technological advancements.
- Rent and utility bills: Contractors can deduct rent and utility bills from renting a workshop or office space.
- Home office deduction: If a portion of your home is used exclusively for your HVAC business, you can deduct work-related expenses such as rent, internet, and utilities.
- Professional services: Costs associated with legal, financial, marketing, or other professional services related to the business can be deducted.
- Licensing and permits: Some states require special licenses and permits for HVAC contractors. You can deduct the fees associated with obtaining the licenses from your tax liabilities.
2. Utilize Tax Credits
Tax credits differ from deductions and exemptions. Instead of reducing taxable income, a tax credit is a provision that directly reduces the taxpayer’s final tax bill, dollar-for-dollar.
Maximize your refundable tax credit as an HVAC contractor in the following ways:
Understanding Refundable Tax Credits
As a contractor, you should familiarize yourself with credits applicable to the HVAC industry, such as:
- Residential Energy Efficient Property Credit: Available to those who install renewable energy systems like solar panels and geothermal heat pumps.
- Energy Efficient Home Credit: HVAC contractors of energy-efficient homes can claim credit on new residential constructions that meet the energy-saving requirements.
- Earned Income Tax Credit (EITC): For qualifying low- to moderate-income workers.
- Investment Tax Credit (ITC): Applicable to HVAC contractors working on renewable energy projects. The credit allows for a deduction on solar energy system installations.
- Work Opportunity Tax Credit (WOTC): If you have employees from target individuals who receive government assistance, you may be eligible for WOTC credit.
- Small Business Health Care Tax Credit: If you have a small HVAC business that provides health insurance to your employees, you can deduct this credit to reduce your overall healthcare costs.
How to Maximize Your Refundable Tax Credit Benefits
Ensure you maximize your HVAC company’s refundable tax credit to reduce your tax liabilities and enhance cash flow.
After familiarizing yourself with local and federal credits, investigate state-specific tax credits that apply to your company. Consider consulting with a tax professional to help you identify credits and ensure compliance with regulations.
It’s essential to maintain meticulous records of all business-related expenses that qualify for refundable credits, including:
- Payroll records
- Project documentation
- Receipts for materials and equipment
- Energy efficiency certifications that provide eligibility for credits
- Any costs associated with qualifying activities
Review and Amend Previous Missed Tax Credits
You can review and amend previously missed tax credits for the current or two prior tax periods.
After identifying credits that you previously missed, gather the necessary documentation (invoices, receipts, training certificates, etc.) to support your claim for the missed credits.
Then, use Form 1040-X to amend your return. Ensure you clearly explain the changes you made and the additional credits you’re claiming, including the details on how the credit applies to your business.
Send the form to the IRS and track your amendment.
3. Plan for Seasonal Fluctuations
Seasonality plays a significant role in HVAC business profits, cash flow, and performance, making tax planning essential to accommodate seasonal fluctuations. Here are key strategies to help manage your tax obligations and improve your financial performance while staying compliant.
- Income averaging: Calculate your income averaging to spread your taxable income over several years. This will help minimize your tax liabilities during peak earning periods.
- Accelerated Expenses: Accelerate deductible expenses by purchasing equipment, inventory, and supplies before the end of the tax year.
- Inventory management: Leverage the cash method of accounting (if eligible) to deduct inventory costs after being purchased rather than once sold.
- Seasonal Hiring: Hire seasonal employees during peak seasons to help manage the workload. This allows you to adjust your payroll expenses per income, impacting your tax liability.
- Business structure review: Consult with your tax advisor to reevaluate your business structure (LLC, S-Corp, Sole Proprietor, Partnership) to determine which structure maximizes tax benefits. You can also review your year-end plan to identify potential deductions.
4. Utilize Fringe Benefits Plans
You can offer employees fringe benefits (voluntary benefits) as a supplement to their regular salary to reduce employment tax costs.
Some tax-exempt fringe benefits worth considering for your HVAC company include medical insurance, 401(k) retirement plans, meal subsidies, assistance with childcare, transportation reimbursements, and even tuition reimbursement.
Note that all fringe benefits are taxable unless explicitly exempted from taxation per the Employers Tax Guide to Fringe Benefits. You must include the fair price value (market price) of the benefits in your taxable income for the corresponding year.
5. Optimize Your Retirement Plan
Optimizing your retirement plan will ensure the largest pre-tax contributions, resulting in maximum tax deductions.
When selecting a retirement plan for your HVAC company, remember to consider the needs of your business as well as your employees’ preferences.
Some of the best options for retirement plans include:
- 401(k) plans (Traditional, Safe Harbor, and Simple plans): Employer contributions are deductible on the federal income tax return, and elective deferrals and investment gains aren’t currently taxed.
- Simplified Employee Pension (SEP) IRA: Employers can contribute up to a certain percentage of their salary to employees’ retirement accounts.
- Employee Stock Ownership Plan (ESOP): This gives employees ownership in your HVAC company, boosting morale and productivity while providing a tax advantage.
Conclusion
By effectively utilizing tax planning strategies, HVAC contractors can lower tax liabilities and improve their financial position. If you’re unsure about possible deductions, contact a tax professional to ensure you maximize your tax deductions while staying compliant with the law.