12 Tax Strategies Every Trade Contractor Over $500K Should Be Using (and Probably Isn't)

That's compliance. It's not strategy. Here are 12 strategies I see missing from contractor tax returns every single season. Some are simple. Some require restructuring. All of them are legal, documented, and available to you right now.

1. The S-Corp Election

If you're operating as a sole proprietor or single-member LLC and netting more than $60-70K per year, you're likely paying thousands in unnecessary self-employment tax.

Self-employment tax is 15.3% on your net income. If you net $300K as a sole proprietor, that's roughly $45,900 in self-employment tax alone — on top of your income tax.

With an S-Corp election, you pay yourself a reasonable salary (say $120K for an experienced electrical contractor in Southern California), and take the remaining $180K as a distribution. Self-employment tax only applies to the salary portion. The savings at that income level is somewhere north of $20,000 per year.

The key phrase is "reasonable salary." The IRS wants to see a salary that reflects what you'd pay someone to do your job. For construction trades, there's good data — Bureau of Labor Statistics, industry surveys, local union rates. Your tax advisor should be documenting this number, not guessing at it.

If your CPA hasn't brought up S-Corp election, ask why.

2. Retirement Plan Optimization

Most contractors I meet have a SEP-IRA their accountant set up years ago, or nothing at all.

A SEP-IRA caps your contribution at 25% of compensation (about $69K for 2024). A Solo 401(k) lets you contribute as both employee and employer — with catch-up contributions if you're over 50.

For high-earning contractors ($400K+), a Cash Balance Plan can shelter $150K-$300K+ per year depending on your age. That's a massive deduction your SEP can't touch. If you haven't revisited your retirement plan in the last two years, you're leaving money on the shelf.

3. Section 179 & Bonus Depreciation on Equipment

You bought a $95,000 mini excavator this year. Did you deduct it?

Section 179 lets you expense the full cost of qualifying business equipment in the year you buy it. For 2025, the deduction limit exceeds $1.2 million. Bonus depreciation has been phasing down — 60% for 2024, dropping 20% each year.

Critical detail most preparers miss: the equipment must be used primarily for business. That F-350 you bought? If you're driving it to your kid's soccer game on weekends, you need a mileage log or GPS tracking to prove business use. The IRS doesn't care what you intended. They care what you can document.

4. The Augusta Rule (Section 280A)

If you own your home and your business holds meetings — crew meetings, planning sessions, quarterly reviews, client consultations — this one is for you.

Under Section 280A, you can rent your home to your business for up to 14 days per year. The rental income is tax-free to you personally, and the rental expense is deductible to the business.

At a fair market rate of $2,500-$4,000 per day, that's $35,000-$56,000 in tax-free income.

The catch: you need a written lease agreement, a professional fair market rental valuation, documented meeting agendas, sign-in sheets, and proof the rate is comparable to commercial alternatives. When it's documented properly, it's bulletproof. When it's not, it's a red flag.

5. Employing Your Children

If you have kids between roughly 7 and 17, you can employ them in your business for legitimate work — and the tax benefits are significant.

For a sole proprietorship or single-member LLC (not an S-Corp), children under 18 are exempt from FICA taxes. Their standard deduction covers the first $14,600 (2024) of income tax-free. And that earned income makes them eligible to contribute to a Roth IRA, where it grows tax-free for decades.

What qualifies? Cleaning the shop, organizing the tool crib, filing, social media, phones, job site cleanup, data entry. The work has to be real, the hours reasonable, and the pay reasonable. You need time sheets, job descriptions, and actual payment.

6. Home Office Deduction

Contractors often skip this thinking "I'm on job sites all day." But where do you do estimates? Where do you review plans, handle billing, take calls from subs?

The simplified method: $5/sq ft up to 300 sq ft ($1,500 max). The actual expense method — calculating the percentage of home for business and applying it to mortgage interest, property tax, insurance, utilities, and depreciation — often yields significantly more.

7. Vehicle Strategy

Standard mileage rate: $0.67/mile (2024). At 30,000 business miles, that's $20,100. But the actual expense method on a $75,000 truck — fuel, insurance, maintenance, plus Section 179 depreciation — can be dramatically higher in early years, especially for vehicles over 6,000 lbs gross vehicle weight.

Either way, you need a mileage log. There are apps that make this automatic. There's no excuse for not having one.

8. Cost Segregation on Owned Property

If you own your shop, warehouse, yard, or any commercial property, a cost segregation study can accelerate hundreds of thousands of dollars in depreciation.

Normally, commercial property depreciates over 39 years. A cost segregation study breaks it into components — electrical, plumbing, paving, landscaping, fixtures — and reclassifies them into 5, 7, or 15-year property.

On a $1.5M building, a cost segregation study might reclassify $400-500K into shorter schedules. The study costs $5,000-$15,000. The first-year tax savings is often 10x that. If you own commercial property and haven't done one, ask your advisor why not.

9. Health Savings Account (HSA)

The only triple-tax-advantaged account in the tax code: contributions are deductible, growth is tax-free, withdrawals for qualified medical expenses are tax-free.

For 2024: $4,150 (individual) or $8,300 (family), plus $1,000 catch-up over 55. You need a high-deductible health plan. At a 35% marginal rate, the family contribution saves roughly $2,900/year — and you don't have to spend it this year. Invest it and let it compound.

10. Qualified Business Income (QBI) Deduction

Section 199A gives pass-through owners up to a 20% deduction on qualified business income. For a contractor netting $400K, that's potentially $80K off your taxable income without spending a dollar.

Above certain thresholds, the deduction phases based on W-2 wages paid and depreciable property owned. Having employees and owning equipment actually increases your QBI deduction. If you don't see this on your return, ask your preparer about it.

11. R&D Tax Credit

"But I'm a contractor, not a tech company."

I hear this constantly. But the Section 41 R&D credit isn't just for Silicon Valley. If your business designs custom solutions, engineers workarounds, develops proprietary processes, or creates innovative installation methods — you may qualify.

The HVAC contractor designing custom ductwork for unusual constraints. The electrician developing prefabrication processes. The GC solving structural challenges. This credit is dollar-for-dollar against tax liability, worth $20,000-$100,000+/year. One of the most underutilized credits in the construction industry.

12. Tax Loss Harvesting & Loss Warehousing

If you have investments outside your business — stocks, crypto, rental properties — you should be actively managing your losses.

Individuals can carry capital losses forward indefinitely. A $50K loss this year offsets a $50K gain three years from now. Build a "warehouse" of losses you can draw from strategically.

At year-end, review your portfolio. Sell positions with unrealized losses, reinvest in similar (not identical) assets to maintain exposure. For crypto, wash sale rules don't currently apply the same way, creating additional flexibility.

The Real Question

How many of these 12 are you currently using?

In my experience, most contractors making $500K-$2M are using three or four. Some are using one. A few aren't using any because no one ever walked them through the options.

Every one of these strategies is legal. Every one is documented in the tax code. And every one requires someone who understands both the law and the construction industry to implement correctly.

That's the gap I fill. Not just preparing your return — building a tax strategy that works with your business, your structure, and your goals.