Among current business and industry issues, two stand out in the minds of small and mid-sized construction companies: tax increases and banking restrictions.
After years of lower taxes, it almost seems inevitable they will rise, and companies are worried. “Tax Big Corporations” makes the headlines, but it’s usually smaller companies with five to 75 employees that are the most directly affected by such regulations.
It’s a similar scenario with banking restrictions, which can greatly impede the financial flexibility and liquidity of small and mid-sized companies. And, as the beginnings of the 2020s have taught us so far, the need to be financially flexible and prepared for the unexpected is paramount. Everything can change on a dime.
But there are ways to alleviate the impact of both taxes and financial restrictions. The upside is, they are available to every business out there, regardless of size. The downside is a lot of businesses don’t know about them or use them properly.
Lessen the Tax Burden With Section 179
Most companies have heard of the Section 179 tax deduction. They may have even used it from time to time. But that doesn’t change the fact that it’s easily the best way to alleviate a company’s tax burden annually—especially if it’s used consistently and creatively.
Section 179 allows a company to write off the entire purchase price of qualifying business equipment, new or used. The best part is, almost everything a construction company needs is eligible. Heavy equipment, work vehicles, tools, computers and software, office furniture and office machines, signage and much more are all eligible. Companies can even finance equipment and still take a full deduction.
Section 179 was put in place as an economic stimulus for small to mid-sized companies. It not only gives businesses a handy tax break, it also encourages them to buy more equipment and improve themselves (which also helps the companies selling the equipment, a classic win-win).
So, it is not only easy to qualify (all a company has to do is buy equipment), it is also easy to use Section 179.
If companies take a good look at their operations and budget a certain amount toward yearly improvements, it gives them a reason to use Section 179 consistently. In other words, getting on a steady “improve and upgrade” path annually (complete with selling off older equipment) will help further modernize operations, and it will also greatly reduce a company’s tax burden.
Section 179 is available to every business in the United States, with 2021’s deduction limit being $1,050,000. Companies should use it every chance they can.
Lessening the Impact of Financial Restrictions
Restrictions that the banking industry applies to most small and mid-sized business lending are written into bank lending contracts, and they end up greatly impeding borrowing companies by tying up assets and funds, severely limiting financial and operational flexibility.
1. Blanket Liens
Banks will put a blanket lien on every business borrower, in almost every loan situation. If a company borrows funds from a bank to buy a new machine, the bank will put a lien on all company assets (hence “blanket”).
This can severely limit a company, because it cannot sell or otherwise move any assets without the bank’s permission, which may or may not be given. One example of this is the earlier mention of selling older equipment and buying new replacements to take advantage of Section 179, which would hit a snag with a blanket lien in place.
2. Minimum Balances
Most banks will require a borrowing company to keep 80% of the loan value in the bank with them. This can tie up a company’s assets considerably and, in this age of headline-driven economic peaks and valleys, not having access to liquid cash greatly impedes a company’s flexibility. Imagine a company having its cash tied up when 2020’s shutdowns hit. This was an uncomfortable reality for millions of companies.
3. Annual Loan Requalification
Requalifying for a loan annually is written into most bank loan contracts and gives the bank the right to call a loan in early if requirements are not met. So if a company has an off year, they could be facing an unexpected (and possibly massive) full loan repayment on top of that.
What Can Be Done?
In the case of these restrictions imposed by banks, a borrowing company has two choices: ask that the bank remove these clauses from loan contracts or find another lender who does not use them.
These two instances—being free of restrictions and using Section 179 as much as possible—can create very favorable business conditions for a company, even in the face of unfavorable economic news.
The overall economy and world events are out of our individual control. But by paying attention to tax strategies and financial flexibility, companies can better set themselves up for success in 2021 and beyond.
Originally published by Construction Executive, May 10, 2021. Used with permission.