Construction Company Equipment Depreciation and Entity Layering

The Problem

This commercial construction company was generating $4 million in annual revenue with consistent net income above $900,000. The owner had recently purchased $620,000 in heavy equipment (excavators, loaders, and a crane) but their prior accountant had simply placed the assets on standard MACRS depreciation schedules, spreading the deductions over 5 to 7 years.

The company operated as a single-member LLC taxed as an S-Corp, with no separate management entity. The owner's spouse handled all administrative functions, bookkeeping, and job scheduling but was not on the payroll. The owner was paying income tax on nearly $900,000 in pass-through income with minimal planning.

AE Tax Strategy

1. Section 179 and Bonus Depreciation Under IRC §179 and §168(k)

We reclassified the $620,000 equipment purchase to take advantage of Section 179 expensing under IRC §179 and 100% bonus depreciation under IRC §168(k). Instead of spreading $620,000 in deductions over 5-7 years, the entire amount was deducted in year one. At the owner's combined federal and state marginal rate of approximately 40%, this timing acceleration produced a first-year tax benefit of approximately $98,000.

2. Management Company Structure Under IRC §1362 and §162(a)

We formed a separate management company LLC (taxed as an S-Corp under IRC §1362) owned by the owner's spouse. This entity contracted with the construction S-Corp to provide administrative services, scheduling, bookkeeping, and project management. The management fee of $120,000 was a deductible ordinary business expense under IRC §162(a) for the construction company and became income to the management entity where it could be sheltered through its own retirement plan and reasonable compensation split.

3. Accounting Method Optimization Under IRC §446(e)

We filed Form 3115 under IRC §446(e) to change to the completed contract method for projects under $30 million, allowing deferral of income recognition on in-progress jobs until completion. This produced an additional $58,000 in tax savings through the Section 481(a) adjustment.

Before & After Comparison

Key Takeaways

• Construction companies that purchase or finance heavy equipment should evaluate Section 179 and bonus depreciation every year — spreading deductions over 5-7 years when immediate expensing is available leaves significant money on the table.
• A management company structure can shift income to a lower-bracket spouse while creating additional retirement plan contribution capacity under IRC §401(a).
• The completed contract method under IRC §446(e) is available to construction contractors on most projects and can defer significant income recognition.
• Entity layering must have genuine economic substance — the management company must provide real services at arm's-length rates to withstand IRS scrutiny.