Regardless of your trade in the construction industry, allowable tax deductions can lower your tax liability and possibly lead to getting a tax refund. You can deduct common expenses such as tools and materials, and even certain other items that come in handy in your business or on the job.
- Who can take deductions
- Mileage could be your biggest tax deduction
- Tax deductions for tools of the trade
• If you're an employee for a construction company, you cannot deduct unreimbursed expenses unless they occurred prior to tax year 2018. If you’re an independent contractor, you can deduct work related expenses that are ordinary and necessary.
• The cost of work related travel—driving to and from work sites, client meetings, and picking up tools and materials—typically is one of your largest deductions.
• You can also deduct the cost of tools and equipment, work clothing and gear, advertising and marketing expenses, subcontractor or employee salaries, phone and internet costs, membership and license fees, subscriptions, and other expenses.
• Equipment that you use for multiple years usually must be depreciated over their useful lives, meaning that you claim a portion of them on your taxes over a period of years.
Who can take deductions
If you're an employee for a construction company, rather than an independent contractor, and your employer doesn't reimburse you for expenses on the job, you can usually deduct them for tax years prior to 2018. Beginning in 2018, unreimbursed employee expenses are no longer deductible. Independent contractors generally have no limit on the ability to deduct work related expenses as long as they are ordinary and necessary for your line of work.
Mileage could be your biggest tax deduction
The driving that you do while going to and from job sites can be a deductible expense. You can also deduct mileage for other work-related travel such as:
- from one work location to another
- to meet with clients
- to buy tools and materials for a construction job
The IRS allows two methods for calculating the cost of using your vehicle for your business, actual expenses or standard mileage. The standard mileage rate you can write off changes every year.
- The rate for 2023 is 65.5 cents per mile.
- For your records, document all dates, miles traveled, and the construction-related purpose of each trip.
- It may be a good idea to use a mobile app, like QuickBooks Self-Employed, to help keep track of these miles for you.
You can also calculate the actual expense of using a vehicle for construction-work purposes, rather than using the standard mileage rate.
- Actual expenses might be beneficial especially if you had a large vehicle-related expense, such as a major repair.
It often pays to calculate your expenses both ways to see which produces the larger deduction.
Tax deductions for tools of the trade
You can usually deduct the full cost of some tools and equipment immediately, and the cost of certain long-lasting tools over a certain period of time. Items constructions workers can deduct in the year incurred, or bought, typically include:
- car and truck expenses
- advertising and marketing
- subcontractor or employee salaries
- supplies and materials
- small tools that are expected to last a year or less
Items you buy that are expected to last more than one year are considered business assets, such as:
- cement mixers
- buildings and real estate
- other heavy machinery
Since you will continue to use these items for multiple years, they usually need to be depreciated over their useful lives. That means that each year you claim a portion of them on your taxes, their remaining value will decrease. For example, if a cement mixer costs $60,000 and has a depreciation life of 10 years, each year you will need to remove $6,000 from its value when you claim it as an expense. Years 1 and 2 would look like this:
Year 1: Value at beginning of year: $60,000
Depreciation amount: $6,000 ($60,000 ÷ 10 = $6,000)
Value at end of year: $54,000 ($60,000 - $6,000 = $54,000)
Year 2: Value at beginning of year: $54,000
Depreciation amount: $6,000
Value at end of year: $48,000 ($54,000 - $6,000 = $48,000)
TurboTax Tip: If you’re an independent contractor and expect to owe taxes of $1,000 or more, you're usually required to make quarterly estimated tax payments in order to avoid underpayment penalties. Those payments are generally due during the year on April 15, June 15, September 15 and then on January 15 of the following tax year.
Steel-toed boots are a shoe-in at tax time
Hard hats, boots, and tool belts are essential to the construction trades and definite business deductions. When used for the sole purpose of construction work, the clothing you wear on the job and the gear you purchase exclusively for construction work can be tax deductible.
You can usually take a deduction for an allowable expense that you did not receive a reimbursement for.
Don't forget to deduct fees
The costs associated with learning, joining, and maintaining a job in construction can be tax deductible, too. As a construction worker, you may have paid the following tax-deductible expenses:
- trade school tuition
- subscriptions to trade or technical journals
- memberships to construction organizations, unions, and business associations and leagues
- licensing fees, including renewals
Flexibility in Figuring Out What's Deductible
Contractors, subcontractors, and construction workers work full time, seasonally, or often have side jobs. To ensure you pay the correct amount of taxes, keep track of your "ordinary and necessary" expenses for each of your jobs should the IRS ask for documentation.
- An ordinary expense is a common cost or expenditure, and a necessary expense is a useful and appropriate expense that helped you in your construction business or job.
- Although it's called "necessary," the expense doesn't have to be indispensable to be deductible. For example, if you pursued continuing education in your field that wasn’t required, you can likely claim it.
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