Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.” That is an unfortunate reality, and even businesses in the HVAC industry must manage their tax liabilities wisely to avoid financial struggles. But how can they do so effectively?
Taxes can be complex in the HVAC industry. However, businesses can manage it through timely and accurate reporting, budgeting for taxes in owner distributions, scheduling regular tax reviews, utilizing industry-specific incentives, tax automation, and planning for seasonal fluctuations.
All businesses have to keep a close eye on their financial obligations to avoid penalties and remain sustainable in the long run. However, the unique nature of HVAC operations can complicate the process. Let’s explore some best practices I recommend so your HVAC business can stay on top of tax liabilities.
Why Proper Tax Management Matters in the HVAC Industry
Frequent equipment purchases, workforce fluctuations, and project-based income characterize the HVAC industry. When you fail to stay ahead of your tax liabilities, you can disrupt cash flow, impact profit margins, and adversely affect your business growth.
It’s easy to miss deadlines for tax payments, but that can lead to heavy penalties and interest charges. These tend to accumulate, and before you know it, you’ve caused severe harm to your business’ financial health.
When you do proper tax planning, you can forecast tax payments and ensure you have the necessary cash when it’s time to pay. In other words, you can avoid those inconvenient surprises that tend to strain the budget during slow seasons.
But proper tax management isn’t just about avoiding the negative consequences. Using a well-organized tax strategy will improve your business’s overall financial health, which is likely to attract potential buyers or investors down the road.
But wait; there’s more good news. Businesses in the HVAC industry can benefit from specific tax credits, such as the 45L Credit For installing energy efficient systems included in the Inflation Reduction Act of 2022. You miss an incredible opportunity to reduce your tax burden when you don’t claim these credits.
Over the years, I’ve found several best practices that help HVAC businesses stay on top of their tax liabilities in this unique industry. If you follow these six tips, you can avoid unexpected tax surprises and benefit from all relevant tax credits.
1. Keep Your Financial Records up to Date
Keeping up-to-date financial records is one of the most fundamental principles of effective tax management. They should provide a clear picture of your business’s financial situation since that makes it easy to estimate taxes more precisely. It is essential in industries like HVAC since revenue and expenses tend to fluctuate according to seasons and project timelines.
It’s a good idea to invest in reliable accounting software to help you keep track of expenses, revenue, and deductions in real time. QuickBooks and Xero are popular with small and medium-sized businesses.
Keep all receipts, invoices, and other financial documents and store them securely. Reconcile your accounts monthly to catch errors early and maintain accurate financial statements. That way, you can file your tax reports on time, every time.
This is fundamentally bookkeeping which we perform.
2. Budget for Taxes in Owner Distributions
If your HVAC business distributes profits to its owners, you will have to account for tax liabilities before disbursing funds. If you fail to allocate enough for taxes, your company could fall short when the tax bill arrives, and that could happen during those slower periods when cash flow might be a little bit tighter.
It’s worth paying an accountant and working with them to estimate your tax liabilities based on projected income and expenses. This helps prevent those surprise tax bills.
When you distribute profits to owners, hold back a percentage to cover future taxes. For example, set aside 30 to 40% of your net income to help ensure the business has sufficient reserves when tax season comes around.
3. Schedule Regular Tax Reviews With a Certified Public Accountant (CPA)
Regular tax reviews can help you keep up with tax law changes, especially those specific to the HVAC industry. Many business owners assume that once they’ve filed their taxes, they can forget about them until the following year. But that’s unwise since proactive reviews with a tax advisor can reveal opportunities to reduce liabilities and ensure compliance.
Regular reviews also give your CPA the opportunity to identify deductions and HVAC-related credits you may have missed, such as Section 179 deductions for new HVAC equipment or fuel tax credits for fleet vehicles. The CPA can help you restructure some of your larger purchases to maximize the tax benefits.
Remember that tax laws can change annually, especially around depreciation, energy efficiency, and capital expenditures. A tax advisor with experience in the HVAC industry can keep you compliant and help you find unique ways to minimize your liabilities.
4. Utilize Industry-Specific Tax Credits and Incentives
One great advantage of running an HVAC business is that it gives you access to several industry-specific tax credits and deductions. If you know how to use them, they can reduce your tax burden significantly.
Some of the tax credits for HVAC companies include:
- 45L Tax Credits: One of the most valuable tax credits available to HVAC businesses is the 45L Energy-Efficient Home Credit. If your business installs energy-efficient heating and cooling systems in residential properties, you may qualify for a tax credit of up to $2,000 per dwelling unit. This credit applies to both new construction and retrofitted homes that meet specific energy efficiency standards.
- The Work Opportunity Tax Credit (WOTC): HVAC businesses that hire individuals from targeted groups, including ex-felons. By providing opportunities to these workers, you can earn a tax credit of up to $9,600 per eligible employee. Many companies in the HVAC industry take advantage of this credit to lower their costs while building a diverse workforce.
- Section 179 Deductions: HVAC businesses can deduct the total purchase price of qualifying equipment purchased or financed during the tax year. This is useful because it reduces the cost of new HVAC systems, vehicles, and tools.
- Research and Development (R&D) Tax Credit: If your HVAC business develops new technologies or improves existing ones, you might qualify for the R&D tax credit. This could include activities like creating more efficient HVAC systems or developing new installation techniques.
Remember that these credits and regulations change regularly, so it’s best to ask your tax advisor for the latest information.
5. Automate Tax and Accounting Tasks
Automating tax and accounting processes has become essential in modern times. Automation improves accuracy and frees up your time to focus on growing your operations. Automation reduces (or eliminates) the risk of data entry errors or missed deadlines by automatically generating financial reports, tracking expenses, and reminding you of important tax deadlines.
Many accounting platforms integrate with tax software, which makes it easy to file your tax returns. You can also set reminders for quarterly estimated tax payments to ensure you stay compliant year-round.
6. Plan for Seasonal Income Fluctuations
The HVAC industry is seasonal, which can complicate tax planning. You may have a big project in the summer, providing a stable cash flow. But winter might be slower, causing significant cash flow problems.
That’s why tax planning and preparation are crucial, and filing quarterly estimated taxes is a must. Work with your CPA to calculate these payments accurately. Use cash flow forecasting to see ahead to when funds might be tight, then use high-income months to set aside money for your business taxes.
Conclusion
Nobody enjoys talking about taxes, but they can make or break a business. If you manage your HVAC business’ taxes with wisdom, you can avoid the potential pitfalls of penalties and surprise tax payments. But you will also be able to benefit from tax deductions and credits that can help you weather those low-cashflow months.