This article is the second in a series to examine what federal and private construction companies pay in federal taxes and what techniques some of them use to minimize their tax burden. Click here for the first article.
A recently Analysis of the construction dive found that the effective federal tax rates for public construction companies are among the lowest of all industries. The 19 largest profitable companies in the industry paid a total of 16.8% of their U.S. profits in federal taxes in 2020, one-fifth less than the statutory rate of 21% set by Congress.
Of these, 12 – or almost two thirds – paid less than the statutory rate.
These construction companies relied on several regulations to reduce their tax bill, all of which are completely legal. Here is a look at the main techniques they used:
1. Depreciation of assets
Andrew Kahn, a home finance chartered accountant for Bethlehem, Pennsylvania-based consultancy Concannon Miller, the heavy capital investments that construction companies make is one of the primary avenues leading to lower taxes for those companies.
"The reason for an effective interest rate of less than 21% lies in the favorable depreciation provisions," said Kahn. “So if you have a construction company and you add $ 5 million in new assets – like buying machinery, equipment, and vehicles – those assets are depreciated.
While specific expenses are typically not included on a public company's 10K filing, a note on the use of depreciation can be found in the deferred income tax expense section of these annual reports. The section lists what a company believes is possible in the future based on the measures taken in the current year.
So if a company writes off the cost of an excavator for tax purposes in the current year, but then gets some of these costs back when it is sold, the difference between the two numbers falls into the category of deferred taxes.
For example, construction and engineering firm Jacobs reported $ 53.5 million in federal deferred tax expenses for 2020, a number that is just below the $ 55.3 million it has for all of its federal, state, and federal tax obligations. National and foreign level.
"The amount of federal income tax the company was able to defer this year is roughly equivalent to its total worldwide income tax," said Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, a leftist thinker Panzer. "That tells me that the main mechanism the company uses to get to zero is likely due to depreciation."
Jacobs received a federal discount of $ 37 million in 2020, which, according to Construction Dive's analysis, increases its effective federal tax rate to -17.4%. The company did not respond to requests for comment for this series.
In theory, deferred tax expenses are just that – a tax company will pay in the future – but that's not always the case. A study by ITEP who analyzed corporate tax payments over an eight-year period found that in some cases deferrals can be extended indefinitely.
"For every year there is a deferral, there should be another year in which deferrals from previous years are paid," Gardner said. "But at the same time there are other cases where it really seems to be perennial."
Together, the companies analyzed reported deferred tax expenses of $ 197 million for 2020. These included:
|Companies||Deferred Tax Expenses|
|Jacobs||$ 53.5 million|
|Tutor Perini||$ 39 million|
|Orion Group holdings||$ 23.9 million|
|Sterling Construction Company||$ 19.4 million *|
|Great Lakes Dredger & Dock||$ 17.5 million|
|MasTec||$ 14.8 million|
|Infrastructure and energy alternatives||$ 10.1 million|
|Integrated electrical services||$ 9.3 million|
|Comfort systems USA||$ 5.5 million|
|Tetra Tech||$ 2.2 million|
|Construction partner||$ 2.2 million|
* Combined federal and state deferred tax expense
Source: Company 10-K & # 39; s.
2. Stock Compensation
Of the 12 companies in Construction Dive's analysis that paid less than the legal company rate in 2020, almost all took advantage of the amortization of employee stock-based compensation.
As a rule, companies grant stock options for executives – the right to acquire shares at a fixed price in the future.
For example, a company might give an executive the right to buy 1 million shares at $ 10 each for a period of 10 years. If the company's share price is $ 50 when this right is exercised, the company can write off the full value of those shares – $ 50 million – on its taxes.
While this is a valid and legal way for companies to reduce their federal tax liability, Gardner said it can also be an area where companies can offset their taxes without actually incurring any real expenses.
"There's a feature in tax law that allows companies to essentially write off the cost, with air prices tied to dollar-for-dollar stock compensation, just as if the company had written these employees a check," Gardner said. "But there are obviously no direct cash expenditures associated with this."
The total share-based compensation spend of $ 48.5 million reported by the contractors analyzed here in 2020 included:
|Companies||Share-based compensation expenses|
|MasTec||$ 21.9 million|
|Jacobs||$ 10.2 million|
|Infrastructure and energy alternatives||$ 4.4 million|
|Tetra Tech||$ 4.3 million|
|Tutor Perini||$ 3.2 million|
|Sterling Construction Company||$ 1.8 million|
|Great Lakes Dredger & Dock||$ 1.2 million|
Source: Company 10-K & # 39; s.
3. R&D tax credit
Construction companies also apply the so-called research and development tax credit, which reimburses companies through their taxes up to 12% of expenses in this area.
According to Cole Marr, director of research and development at the Californian accounting firm Sensiba San Filippo, Construction-related activities Those who can qualify include design improvements for LEED or energy efficient projects, developing unique construction methods and processes, experimenting with new building materials, or developing or improving construction equipment.
Among the analyzed construction companies Comfort Systems USA, an engineering, electrical, and plumbing company took advantage of the $ 26.1 million tax credit while tutor Perini reported $ 3 million in R&D tax credits in its 10-K. Great Lakes Dredge & Dock, Tetra Tech and Infrastructure and Energy Alternatives also took out small loans in this area.
The loan is intended to encourage companies to invest in research into new products and technologies in order to stimulate innovation and thus economic growth.
"From the government's point of view, they are trying to improve their process and make it more efficient in order to advance the economy and economy, which is good for everyone," said Kahn.
But the R&D tax credit is often criticized for its complexityeffectively limiting its benefits to large corporations that can hire an army of accountants to fight their way through.
"There are a few things in the tax code that could be made easier," said Garrett Watson, senior policy analyst at the Tax Foundation, a right-wing think tank. "The research and development tax credit is one example. It's incredibly complicated, so many smaller firms find it hard to put up with."
4. Loss carryforwards and carrybacks
Another tax break that can help reduce a company's debt to the government is net loss carryforward. This allows companies to use an excess loss in the past, when they owed little or no tax, in a future year when they make money and possibly owe more. Such losses can be carried forward indefinitely.
For example, Ron Ballschmiede, chief financial officer at Sterling Construction Co., based in The Woodlands, Texas, explained in an email how the company applied 2011 losses to offset profits now to bring the effective federal tax rate down to zero in 2020, for the second year in a row, this was the case.
"Due to the net operating loss carryforwards, the company does not expect any cash payments for federal income taxes in 2020 and 2019," the company reported in its 10-K.
MasTec and Integrated Electrical Services (IES Holdings) also reported that they will be using the process in 2020.
In addition, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows companies to carry back net operating losses from 2018, 2019 and 2020 for five years. This enables them to effectively amend previous tax returns and receive reimbursements for those losses if it is tax-beneficial for them.
With the corporate income tax rate at 35% prior to the enactment of former President Donald Trump's Tax Cuts and Jobs Act in late 2017, tracing recent losses back to previous years can help companies get back more of the taxes they may have paid below the higher Sentence, so Gardner.
A good example is the 10-K from Tutor Perini. "Under the CARES Act, which came into effect on March 27, 2020, NOL (net operating loss) generated in 2019 can be carried back for up to five years, while NOLs could only be carried forward under previous regulations," the company said in its 10K file. "This allowed the company to take advantage of the tax rate differential by tracing the NOL back to tax years when the statutory federal tax rate was 35% instead of the current rate of 21%."
5. 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 qualified energy efficient systems in buildings. First founded in 2006, it was recently made a permanent program under the Budget Act 2021, which came into force on December 27, 2020.
Jacobs took a $ 7.3 million deduction under the rule, while Comfort Systems USA demanded $ 1.1 million.
All of the above methods are unreservedly permitted within the tax system, emphasized the tax experts surveyed for this series. "There is no suggestion that what these companies are doing is anything other than absolutely correct," said Gardner.
Tax law is created for companies to take advantage of these types of deductions to incentivize them to invest in their businesses and employees, thereby boosting the economy as a whole.
"You keep hearing about all these very big companies that don't pay taxes even though they're making money," said Kahn. "But obviously there are tax laws that allow you to get things out of the way for tax purposes more quickly to generate investment and progress."