The Internal Revenue Service announced they would begin accepting and processing tax returns on Jan. 23, 2023. Tax season is stressful for business owners, whether you’re just starting out or you’ve been at it for years. On top of running a company, you have about a month to get everything together to complete your tax return. We thought we’d sit down with Joseph Horzen, a certified public accountant (CPA) with SorenMcAdam, to walk us through HVAC business taxes. We offer tips, best practices, and possible deductions your HVAC business can take advantage of today, and going forward.
When Are My HVAC Business Taxes Due?
If you have an S-partnership or LLC, you must file your business taxes by March 15, 2023, to avoid any late penalties. Now would be the time to start gathering documents and scheduling an appointment. Your tax preparer (or you) might choose to handle taxes via Zoom, over the phone, or in person. Also, the sooner you start, the better. This gives your tax preparer or CPA time to look over the documents. It also gives you time to hunt down anything you might have missed.
Meet With Your CPA Quarterly
The best way to hedge taxes is to meet with your CPA on a quarterly basis. That way, if you are having a banner year, you can make moves to take action in order to minimize taxes owed. Alternatively, if you’re having a down year, quarterly meetings can help potentially skip estimated tax payments that aren’t needed due to the down year and corresponding reduced profit.
Evaluate Independent Contractors
“One general cautionary statement is that an evaluation should be done for anyone they are treating as independent contractors,” said Horzen.
If you utilize independent contractors, they need to fall under the IRS guidelines (noted here) in order to make sure they are truly considered independent contractors. Some of Horzen’s clients have had to bring folks previously classified as independent contractors into their company as employees to be in compliance.
Best HVAC Business Accounting Software for Taxes
The best HVAC accounting software for smaller or new contractors is whatever works best for them. Traditionally, Horzen says most start out with Quickbooks and then graduate to larger software as they grow.
“When they are just doing the smaller residential work, contractor-specific accounting software isn’t really worth the costs. Most of their jobs start and end within at most a week.”
Once contractors start bidding on larger commercial jobs that last for six months or more, advanced software becomes critical. With advanced software, it’s easier to track job costs more accurately. It also helps generate job schedules with costs in the job versus estimated costs if the software has estimating module. Lastly, it can help generate job schedules for jobs in progress.
How HVAC Business Software Can Improve Workflow: Do you feel like your business could be more efficient? Are there areas where you feel like you’re just not as productive as you could be? If so, it may be time to invest in some business software. HVAC contractors can benefit greatly from business software that improves workflow. Read more ➡
Get Prequalified for Bigger, Public Jobs via GAAP
In addition to taxes, many HVAC contractors would benefit from reviewed or audited financial statements under Generally Accepted Accounting Principles (GAAP) from a CPA. This is in order to earn pre-qualifications for many public jobs, as well as cheaper bonding for larger jobs.
“In my experience, this has catapulted many of our HVAC contractors,” Horzen said. “It’s allowed them to start bidding on larger jobs and as a result grow their company from mostly residential and smaller commercial work to both residential and larger commercial work.”
Additionally, Horzen also sometimes sees the cost savings in bonding outstrip the cost of the financial statement review or audit because the bonding company is theoretically taking on less risk.
Tax Benefits of Owning Your Building or Land
Most HVAC companies have an ever-growing fleet of vans and trucks. Another good tax hedge is for the owners of the HVAC corporation to purchase the building or land for the company’s headquarters. Then, put the building or land into an LLC and lease it to the operating company.
“This allows the owners to get money out of the company as a deduction, and pick it up as income on the LLC. They will have the hedge of depreciation, property taxes, and interest if the property is financed. This results in the ability to build equity in a real estate investment while getting a tax deduction. The land is something the company will need whether it is owned by the owners or leased from someone unrelated.”
3 HVAC Employee Incentive Program Ideas: In order to keep your HVAC business running smoothly, it is important to have a strong, motivated team. employees who feel appreciated and enjoy their work are more likely to be productive and less likely to leave. A well-designed employee incentive program can help you achieve this. Here are three ideas to get you started ➡
What HVAC Businesses Should Know About the SEC. 168(K) Tax Deduction
HVAC contractors can significantly benefit from the section 168(K) deduction. It is the direct expensing of equipment purchases and vehicle purchases. The gross vehicle weight (GVW) must be in excess of 6,500 pounds.
“Some of the greatest advantages we see missed is when they finance the equipment or vehicles and fail to inform their CPA,” Horzen explained. “As a result, they only get the deduction for the payments they made, which is incorrect. They could expense the entire value of the asset, which is correct.”
Save All HVAC Business Financing Documents
Horzen recommends that HVAC contractors save all documents the company has for financing anything. Make sure to provide these documents to your CPA at year-end for review. There are probably payments on said financing within the books somewhere that could count as a deduction.
Final Thoughts on Tax Season
Teaming up with a CPA that understands the unique challenges of your industry is critical to your business’ success. If you need help with HVAC business taxes, you can reach out to Joseph Horzen at SorenMcAdam.