EP231: Why Every Contractor Needs a Specialized Tax Advisor: A Conversation with Cody Daniels

Brad, thanks for having me. Excited to be here.

Yeah. I don't often hear people say that it's going to be really exciting. Obviously, I think there's probably a little bit of sarcasm in there. A little bit of sarcasm. Yeah. It's important. It may not be exciting. If you're driving, I suggest maybe you pull over and take a little break so you don't fall asleep at the wheel as we get into this. If you're an entrepreneur, this is one of the most costly things that you're going to incur in your life is taxes. So it's an important thing to talk about.

Yeah, so I founded Builders Tax Group in 2024 after spending the first 12 years of my career at a regional CPA firm located here in Chicagoland. Started out with that firm right out of college, spent the first 12 years of my career there. Great firm, saw tremendous growth there. But as you experience tremendous growth, you know, things tend to change, you know, just overall the environment, you know, kind of evolved. And I wanted to be able to focus all of my time on working with construction and real estate type clients and really clients of a particular size. As they were growing, they're starting to move upstream to larger contractors. I was working on, you know, contractors doing 200 plus million dollars a year in annual revenue. And I really wanted to focus on. kind of what I consider the mom and pops, people doing maybe up to $10, $20, $30 million annually. I kind of wanted that to be my focus. So left that firm in 2024, started Builders Tax Group. And yeah, we're niche, specialized, expert, whatever term you want to use, firm focused on serving construction and trades businesses, providing tax. accounting, advisory fractional CFO type services, as well as segregation for anybody that owns real estate in addition to their construction business.

So cost segregation is a tax concept where anybody that owns real estate that they use in any sort of business purpose. So it could be, you know, you own the office building that you operate out of. It could be rental properties that you rent out. So we're very clearly not talking about your personal residence, your vacation home, you know, your fun properties, things like that. It's got to have a business purpose behind it. But what a cost segregation study can do is it will identify components of that real estate that qualify for shorter tax depreciation treatment. So under normal tax law, a residential rental property will be depreciated over 27 and a half years. A commercial property is going to be depreciated over 39 years. So if you go out and you buy a combination office warehouse space to run your construction business out of, it's going to take you 39 years to recover the cost of that property. be it depreciation deductions. Through a cost segregation study, we can come in and identify components of that, such as maybe flooring. A lot of types of flooring are going to qualify for a five-year depreciation schedule. Things like maybe cabinetry or other furniture and fixture type items are going to be seven-year assets for tax purposes. And actually, the outside of the property, the exterior of the building, your land improvements, so your landscaping, your parking lot, your sidewalks, those all qualify for a 15-year. year treatment for tax purposes. So via this study, essentially what you're able to do is accelerate those tax depreciation dollars into the current year and really generate significant tax savings for yourself, I guess, alternative of taking 39 years or 27 and a half years to depreciate that property and not to jump too far ahead, but because the new tax bill has reintroduced and made permanent 100% bonus depreciation, These cost segregation studies, all of those assets that you would reclassify to a shorter life are going to be eligible for 100% bonus depreciation. So it's a full write-off. It's not, oh, we're going to take our flooring and depreciate it over five years. No, we're going to write the whole thing off in year one. So depending on the type of the property, you could easily see 20% to 30% of that building cost being written off in the year that you acquire that building.

Yeah, easily. I mean, if you're somebody that's doing investment on the side of your construction business, I mean, yeah, you could be talking hundreds of thousands of dollars of additional depreciation deductions. And depending on your situation, you may be able to use those deductions to offset income from your construction business. So yeah, very powerful opportunities out there for anyone that owns real estate right now.

I would say the most common mistake, and we're going to probably get a little more technical here than I would necessarily like to. And you kind of hit the nail on the head early, Brad. I don't expect anybody that's listening to learn this stuff and be able to do their own tax return. We just want to empower people. It's just a base level knowledge so that they can take questions to their tax preparer, their CPA, and have informed conversations and be aware that there's opportunities out there that they should be taking advantage of. So with that little disclaimer, I think the biggest mistake that I see is misapplication or misunderstanding of the accounting methods that are available to contractors for tax purposes. So I think most contractors, especially if they're doing new construction, let's maybe focus on those types of businesses right now. If you're more of a service-based contractor, this may or may not apply to you. But especially if you're doing new construction, bigger jobs, most contractors are aware that they need to use the percentage of completion method for their books. So what that means is simply that as you incur costs on the job, you're recognizing your revenue to the extent that that job is being completed. I guess a real simple example, you have a $100,000 job. You think you're going to incur $70,000 of direct costs on that job. So you're going to have a $30,000 gross profit on that job. If at the end of the year, you have recognized $35,000 of costs, that job is 50% complete. You should recognize $50,000 of revenue on that job, irrespective of what you've billed that client. So you may have billed the client nothing. You may have no outstanding receivables, but you still need to recognize $50,000 of revenue. So that is, I think, conceptually what most contractors should be doing for book purposes. But there are a variety of other methods available for tax purposes that if you're not in tune with the construction industry from a tax perspective, you may be missing out on opportunities there. So there are a variety of exemptions from the percentage of completion method that exists for tax purposes. They would allow you to use something like a completed contract method where you defer all of your gross profit until the year that the job is done. So if you have a big job that takes two, three, four tax years to complete, instead of recognizing income throughout the life of that job, you can kick the can all the way to the year that the job is complete and defer all of that tax liability into the future. So I just see a lot of, I'm going to call them your main street. generalist CPA firms, you know, John Smith, who's on Main Street, got the sign out there, been there for 50 years. If they're not in tune with construction, they're not frequently looking for these opportunities to defer income and, you know, take advantage of other methods that are available to contractors. They just kind of, you know, they just do status quo and file the return. And, you know, it's ultimately it's a timing difference. So you're going to pay the tax eventually. But we all know that a dollar today is worth a lot more than a dollar four years from now.

I wouldn't really say it's even a benefit. It's just a requirement. It's just under generally accepted accounting principles. That's how contractors are required to recognize their revenue. So if you're somebody that has bank debt or you're looking to get bonding for jobs. Whoever is using your financial statements, a banker, bonding agent, et cetera, they're going to expect that your financials are on that percentage of completion method because from their perspective, it's the truest representation of your income. Again, your billing practices become irrelevant at that point in time. It's really just based on what progress have you made on the job, and that is how your financial statements are presented. I wouldn't necessarily say it's an advantage. It's just really kind of the requirement.

And that's why for, sorry to jump in there, but that's why for tax purposes, we want to explore other methods, right? Because what if you've collected nothing? but you do have that million dollars of revenue on the books. Well, you don't want to pay tax on the million dollars if you haven't collected any of it, right? So let's explore other methods for tax purposes. Let's get the best of both worlds, right? Let's present your financials on that percentage of completion method so that your banker or your bonding agent is happy and they can see how the jobs are progressing. But then on the tax side, let's take advantage of the methods that allow us to not pay tax on paper income, phantom income.

Yeah, yeah. I mean, I think, I don't know that I have a threshold, really. I think it's going to depend on what you need your financial statements for. So even if you're doing a million, two million in revenue, but you need to have good financial statements for the bank, you're probably going to want to go through that little bit of extra effort to present them on the percentage of completion method if that's what they're requiring and expecting. So it really depends on your needs. I will say I work with a lot of smaller contractors that are probably five million and under where they don't have the need. to present on the percentage of completion method. So we're not going to go through, you know, the extra effort to, you know, to calculate that and complete those adjustments in their financial statements. I would say for sure, if you're over 10 million, you probably have a need out there where somebody external is utilizing your financial statements and they're going to want to see it presented that way. I guess I'm trying to think of other examples here. I have a client, their GC probably doing 3 million on average every year. They want their financial statements on percentage of completion because they're part of a mastermind group. And part of their meetings is semi-annually, they compare financial statements to each other and they want to have it presented in a way that everybody's presenting on the same method of accounting, regardless of the size of their business. And so, yeah, they're willing to spend a little bit of extra money to make sure that things are presented in that way so they can come in and, you know, contribute to the to the mastermind group.

question, Brad. And I actually, I have the framework for this. I could send this to you. Maybe we could link it in the show notes.

I put an ebook together at the end of 2024. It's called Laying the Foundation. It's 10 strategies for contractors to minimize their taxes. So it's 10 different chapters,10 different topics that... you know, contractors should look into, consider to make sure they're taking advantage of all the opportunities out there for them. I can just basically just run through the table of contents and tell you what the different, you know, strategies or opportunities are. You know, number one is you got to have good books. I mean, you got to stay on top of your accounting. You got to have clean financials because that's the starting point. for any sort of tax planning or projection. If you come to me here, you know, we're coming up on Q4 when I start doing all my annual tax planning with clients. If you come to me and say, hey, I haven't closed my books since April, I'm going to be like, I can't do anything for you. Like I need it to be, you know, at least kind of up to date. I need it to be, you know, through August, September, and then we can start having a conversation, right? So I think that's kind of first and foremost, you got to have good, clean books that we can work off of. I would say from there, I think making sure your business structure is set up the right way. So your choice of entity, this is applicable to people just starting out. But I think it's also something that if you've been in business for 10,15,20 years, you might want to reconsider as well, because as your business has grown and evolved, that initial entity structure may not still be applicable. So, you know, evaluating, you know, should I be a sole proprietorship? Should I make the jump to S corporation? If I'm a C corporation, does that still make sense? I think a lot of people with the current tax law think, well, I maybe want to jump to C corporation because there's a flat 21% tax rate there. But you still have the double taxation issue to deal with as far as taking money out of the corporation. Your dividends are subject to a double taxation there. So in a lot of cases, that may not make sense. Are you at the point in your stage of your business where... You're looking at transition, whether that's to an external party, whether that's to, you know, your kids, employees, whatever, you know, the structure of your entity is going to significantly impact how you might want to transition your business and, you know, what tax benefits you may be able to obtain as you transition out of that business. So that's definitely an area I would look at. We already talked about methods. I got a whole chapter on methods in the book. Appreciation is obviously huge. That's a conversation I have with my clients every year. You know, do I go out and buy three new trucks before the end of the year or not? Right. You know, do I go buy this piece of equipment? You know, let's talk about the pros and cons of it. We'll probably get into, again, some of the new changes to accelerated depreciation under the tax bill. So there's a lot of opportunities and decisions to be made there. I think there are a lot of tax credits that are available to contractors that they may not be aware of. One that we'll probably talk about. as it relates to tax law changes, research and development. I think a lot of contractors think that just because I'm in construction, I'm not eligible for things like that. You know, that's for tech companies or pharmaceutical companies. Well, no, there's an opportunity for a lot of contractors to obtain research and development credits. Work opportunity tax credits. If you're hiring, you know, like veterans, for example, I have a client that's a veteran-owned contractor and they try to hire veterans when possible. Well, there's some credits that they can generate by making those hires. Let's see what else. Other chapters in the book. Retirement planning. Retirement planning is huge. Construction is an area where... There may be, I'll call them sort of non-traditional retirement plans that can really work well for them. Something like a cash balance plan. That's more along the lines of like a traditional benefit plan. A benefit plan, sorry. A traditional pension plan, sorry. If you are a union contractor in the bulk of your employee, they're covered by the union retirement plan. You as the owner of that business might consider utilizing something like a cash benefit plan. to sock away significant dollars that are almost exclusively for you. The only employees that would be eligible to participate in that plan are any non-union employees. So maybe your office employees or administrative staff, things like that. So there's some huge opportunities there within retirement planning. Estate planning is definitely something that... But, you know, again, if you're at that stage of your business, you should be thinking about, you know, potential ways to transition the business, potential ways if you have had a very successful business and you have a very large estate, you know, minimizing that so that when you eventually do pass away, you know, you're setting your heirs up for the most efficient tax outcome that they can receive. So, yeah, a lot of stuff in that book. We could probably do a whole episode on that. But.

Yeah, so the One Big Beautiful Bill Act reinstated and made permanent 100% bonus depreciation. So essentially what that means is, you know, any equipment purchases, most vehicle purchases, there are some exceptions for vehicles, but most vehicle purchases, you know, interior build outs, and then even other elements of your building if you're looking in that cost segregation study that we talked about earlier. There's going to be a lot of CapEx that's able to be written off 100% in the year that you make that purchase. And that 100% bonus has not been reinstated. The previous law was a 40% bonus depreciation rate. So you can see here that we're getting another 60% write-off in year one for those types of assets. And again, it's made permanent. which means that it's just not scheduled to sunset or disappear at a future date. Obviously, a new tax law could change that. But we, in theory, have this until somebody in Congress does something to affirmatively get rid of it. It's not like the last time we had a tax bill where it was scheduled to go away. It's around until they get together and pass a law to get rid of it.

No, that's a great point, Brad. Yeah, I don't think effective tax planning is always driving to the bottom, right? I think there are a lot of reasons why you may want to be strategic about the income that you have. You may have... you know, carryovers of tax benefits that are expiring. So there are, you know, again, some of these credits and net operating losses and things like that, they will expire over time. Well, if you have expiring credits, you don't want to lose out on that benefit. So you may not want to drag your income as low as possible. There may be strategic reasons to. Show X amount of income. You may be somebody that's trying to go out and buy a new property and the bank may be wanting to see income on your tax returns.

It's not always good tax money is not always about getting the lowest possible tax liability. It's about getting what makes sense for you based on that year. And everybody's situation is different. And that's why you really should be having these conversations annually, because there may be very valid reasons to not just push it as far as you can take it.

Again, I think that there's maybe a misconception out there that contractors are not an industry where there'd be a lot of opportunities for an R &D credit because they're not... you know, inventing new products necessarily. And they're not doing, you know, sort of these technical like studies and things like that. But the RMD credits a lot more expansive than I think people are aware of. So, you know, simply like investing in new construction techniques, maybe utilizing, you know, like new materials, even more process oriented things where like if you're focused on. implementing new processes to improve efficiency on your jobs, that may be an activity that qualifies for research and development tax credit. And these credits can be pretty significant. And it might be worth highlighting the difference between a tax credit and a tax deduction. So a tax deduction is just simply a reduction of your taxable income. And the benefit of that is achieved at whatever your tax rate is. So if you have a thousand dollar tax deduction, and let's say you're at a 40% overall tax rate, the benefit of that $100,000 deduction is $40,000 for tax purposes. On the flip side, a credit is a dollar for dollar reduction. So if you have a $100,000 tax credit, the benefit of that is $100,000 because it reduces your tax liability. It doesn't reduce your income. So, yeah, I've worked with contractors over the years. I worked with a $200 million electrical contractor. I would say on average, get about $5 million of R &D credit a year. So between the various owners of that company, there was a total $5 million reduction to their taxable income in aggregate, just from going through the process of having this study done to quantify the credits available to them. The reason I guess we were bringing this up as it relates to the One Big Beautiful Bill Act. is there was, for a period of years, a requirement to capitalize the expenses related to R &D activities. So that kind of mitigated or lessened the benefit of an R &D tax credit that was available to you because you had to capitalize and amortize the expenses associated with that. Well, the One Big Beautiful Bill Act has removed that requirement to capitalize those expenses. So now you're not only getting the ability to deduct the expenses associated with that, you can also then now claim the credit and really get kind of the full maximum benefit of that. So I think there's more reason to pursue this if you're a contractor because you don't have that, you know, the kind of conflicting requirements there of capitalization as it relates to the expenses related to R &D activities.

So typically my recommendation would be if I had a client that said, hey, I think I might want to look into an R &D tax credit, I would refer them to a specialist firm that specializes in doing research and development tax credit studies. And essentially what they're going to do is they're going to. come in, do sort of a preliminary review of the different types of activities that you're engaged in, zero in on the activities that would qualify for this credit, and then they're going to help you track the costs associated with that. So for most businesses, it's going to be wages. So if you're a contractor, they have like an engineer on staff, and again, they're doing... you know, kind of like energy efficiency, like evaluations, or, you know, they're doing process improvement type activities, like their wages are likely going to count towards this credit. So they're going to help you quantify the different costs that are eligible. And that's what the credit is based on. It's based on the costs that go into the R &D activities. So they're going to help you, you know, interview employees, quantify the hours that go into it. It ultimately leads to the quantification of the credit.

Yeah, there will be a fee associated with that. The example I gave, you know, they're a $200 million contractor, but I've worked with contractors doing, you know, probably $10 million that this was still very valuable to them. You know, they were still able to generate multiple five figures of credits. You don't necessarily have to be huge to do it. I think, yeah, any anybody that's in, you know, maybe the five plus million dollar range, like there might be an opportunity there.

A lot of the provisions within this bill are taxpayer favorable, but there are some benefits that are going away and a lot of them are focused on sort of green initiatives. So there's a lot of this bill that I've told my clients to be patient with. There's a lot that we don't need to like jump into action right away. There are a few provisions in here that if you want to take advantage of them, they are going away very soon. And one of them is the credit for buying an electric vehicle. So that credit is terminating after September 30th,2025. So if you're somebody that's been on the fence about buying an electric vehicle and that's something you're interested in doing, I would get out there and get moving on that purchase sooner rather than later because after September 30th, that credit is no longer available.

I think it's for new vehicles around $7,500 now.

Right. And I think in most cases now you can actually get it off the purchase price from the dealer. Like the dealer can issue you the credit at the time of purchase. So it used to be you had to claim the credit on your tax return. Now you may be able to get it right at the time of purchase at the dealership. Oh,

it's interesting. I'll be interested to see how it really all works out because the... The caps that are in place may be misleading some individuals. So there is a cap out there on how much overtime you can exclude from taxation. If you're a single taxpayer, it's capped at $12,500. If you're married and you're married filing joint with your spouse, the limit is $25,000. So you're not going to necessarily be able to exclude all of your overtime. There is a cap in place. And furthermore, there is a income limit where if your income is too high, you will not be eligible to claim this deduction as well. So if you're a single taxpayer, the phase out starts at $150,000 of income. So I could see a situation where, you know, if you're a master plumber, you may have income that exceeds $150,000. You may not be eligible for this exclusion. So it looks really good on paper. I think it is going to be really good for a lot of people. But there are some instances where you may be surprised that you don't actually get the benefit for this. The other thing that I think is important for people to realize is that it's not going to increase your paycheck throughout the year. What happens is the amount of overtime is reported on your W-2 and you claim that as a deduction on your tax return. So your employer is going to continue withholding on that overtime via your payroll withholdings throughout the year. What will happen is you claim the deduction and it'll increase your refund when you file your tax return. So you do have to wait to get those dollars until you file your tax return.

Right. So, yeah, it's again, it's one of those things that it looks really good on paper. It looks really good in social media. But when you when you kind of dig into the finer details, you start to find out, oh, well, there are some complicating factors here. You know, again, we're not going to get the money right away if we make too much money. Again, if you're a married couple in high income through your spouse or whatever, you may be phased out of it and not eligible for the deduction at all.

No, there's a famous quote out there. I'll probably butcher it here on the spot, but it essentially is nobody's obligated to pay more than. than they are by the law. You only need to pay the bare minimum by the law. And the IRS is not out to trick anybody. Everybody talks about tax loopholes, this and that. They want you to do what is correct via the law. So whatever's out there, you should take advantage of it without feeling guilty because it is the law. Nobody's trying to pull a fast one over on you. You just... You need somebody to look out for those opportunities because you got a business to run. You're not out there reading tax code and looking out for those opportunities yourself.

Totally. You know, it's. I view my role as kind of a messenger. So if I tell you that you owe taxes, don't shoot the messenger. Call your congressperson and explain to them why the tax loss should be changed. My job is to just ensure that you're paying the bare minimum as required by law. But sometimes the law is what it is, and everybody's going to pay tax sooner or later. So we just do our best to minimize that.

Yeah. I mean, I think that we're seeing a big shift in all facets of our life to, you know, specializations, your, your, your general practitioner, doctor, if you God forbid, get cancer, your general practitioner, doctor is not the person that treats your cancer. They're not the person that does, you know, your heart surgery. So I think, you know, thinking about your, your business as something that's not as important as your health, but pretty important for most people. And I would venture to say in construction, some people may prioritize their business over their health. At least I've seen that throughout my career in some cases. And again, I will stress, I don't think taxes are as important as your health. But I think you should take this very seriously. I mean, this is your livelihood. As an entrepreneur, taxes are going to be one of the things that you spend the most money on throughout your life. And so hiring an expert to help you out, you shouldn't necessarily view it as an expense. I think you have to view it as an investment. It's true. And not an expense. So it's something that if you're hiring an expert, you're working with them proactively, they're going to pay for themselves maybe, you know, tenfold, twentyfold. I mean, I think in certain cases, you know, I've been able to work with clients and save them seven figures of taxes. you know, a hundredfold versus what their investment was. So yeah, I think that it's just, it's one of those things that it's going to be a significant chunk of change that you're spending every year. You want somebody looking out for you. You want somebody that's proactive. You want somebody that's going to, you know, be there when. Times are good and when times are not so good. You know, I think regardless of economic conditions, you know, where things are at, you know, a good professional on your side when it comes to financial advice is always going to pay for themselves.

Yeah. Yeah. I mean, I certainly don't want to. I don't want to speak negatively about my industry, but there's a lot going on within accounting right now. There is a lot of mergers and acquisitions happening. So there's a lot of small firms being bought out by bigger firms. And so that person that you worked with for, you know,20 plus years, they're on their way out the door. You're getting reassigned to somebody you have no relationship with. I hate to say it, but, you know, as they. acquire these other businesses, they're going to do a right sizing of clients. So they're going to be clients that don't fit their model and that they're not going to want to work with. And I'm seeing, you know, small contractors that it's like, yeah, I haven't talked to my guy in six months. He can't, he doesn't respond to my emails. It's like, well, because you're, you're not his biggest client. So he's not, he's not going to respond to you because he doesn't care if you leave. And, you know, there's, I think the statistic is that 75% of CPA license holders are at retirement age. So there's a big shift of just overall people exiting the profession. So it's getting difficult, I think, to find good help. Yeah, ultimately, yeah, just to kind of reiterate, finding somebody that's an expert in your industry is, I think, going to become more important over time.

I think, you know, just the big thing is, you know. Take taxes seriously, you know, take the financial side of your business, be proactive. If you're not getting the responses that you need, you know, it's okay to leave and find somebody else to work with. But it's ultimately, you got to look out for yourself, right? I think all of us as service providers, really, we really care about our clients, but you need to be proactive and you need to find the person that cares about you. And if you're not working with that person, you got to take the initiative to to move on and find something else. And, you know, don't, don't wait for the last minute. We're, we're recording this in July. Now we have a lot of time before the end of the year. If you find somebody that is proactive, they can do a lot of good for you before the end of the year. If you call in January, February, most of the writing is on the wall at that point. There may be a few things that we can tweak after the end of the year, but really you're going to get the biggest benefit. by taking it seriously and getting in touch with somebody before the end of the year, giving them all the information that you have about your business, your investments, everything that you have going on and working with that to create just an overall tax strategy that we have, you know, significant time to implement before, you know, before the calendar flips over to January.

question. And I actually read quite a few last year, and I'm trying to think which ones really jumped out to me. I guess I'll point to back here. I will stack. I don't know if there will be video of the podcast. If you're listening to the audio, I guess obviously we'll see this. I have a couple books on traction and EOS. If you're not familiar with that, it is like a system for running your business. They call it the entrepreneurial operating system, EOS. I think that, and whether or not you use EOS or there's some other models out there, but I think, especially as you start to grow your business beyond like a solopreneurship, having some sort of structure is huge. I'm a solopreneur right now. I'm working on, you know, growing this business and building out a team. I use principles of EOS as a one-man band. And it's critical for me. It helps me stay accountable to, you know, just sort of my overall goals and distilling those goals down into sort of 90-day action items. So, yeah, I think I would recommend it. There's a whole series of books related to it. The Rocket Fuel one is great. Traction is a dry read. It's hard to get through because it's very, very much like a textbook. But Rocket Fuel is, you know, kind of what they call a parable. It's like a story. And, you know, I think that's a nice, quick read. And, yeah, anybody that's, you know, maybe has any sort of struggles with their business, I think looking into something like EOS could be huge.

Yeah, so pretty active on LinkedIn if you're using that. Otherwise, I would say just check out our website, builderstatchgroup. com. We have plastered all over the website links to... you know, kind of fill out a quick questionnaire to get in contact with us. I will do, you know, free sort of tax strategy discovery calls with clients. So anybody that, you know, wants a second opinion on anything, happy to jump on a 30 minute call, you know, no charge for that. Just kind of quick run through of your, you know, tax and accounting situation, give you some tips and tricks. If everything looks great, I'm going to tell you that too. If you're working with somebody that really knows their stuff and is doing a great job, you know, I'm happy to. Tell you, stick with them. So obviously no pressure, but yeah, check out the website, the buttons everywhere and yeah, happy to jump on calls to anybody.