A Good Tax Decision Can Still Cause a Problem
A contractor bought a new dozer last year.
His CPA told him he could write off the whole thing.
It lowered his taxable income and saved him a nice chunk of taxes. The problem started midway through the summer when he asked his agent to increase his bonding capacity.
The response surprised him.
“Increase?” his bond agent said. “Based on these financials, your net worth is down. And you’re asking for more bonding?”
He hadn’t thought about that.
The write-off saved him money on taxes, but it also made the financials being used by his surety look weaker. By the time he found out, the tax decision had already been made and now he was asking for more bonding at the same time.
The write-off itself wasn’t necessarily a mistake.
Under current federal rules, qualifying equipment acquired after January 19, 2025 can generally qualify for 100% bonus depreciation. For a contractor making a large equipment purchase, that can mean a very large deduction in the year the equipment is placed in service.
But taxes were only one part of the decision.
Your Surety Is Looking at Something Different
Your CPA is trying to help you manage taxes.
Your surety is trying to decide how much risk they are comfortable taking on your company.
When you ask for more bonding capacity, they are going to look at your financial position. That includes things like working capital, net worth, leverage, cash flow, backlog and profitability. Those numbers help them decide whether your company has enough financial strength to support the projects you already have and the additional work you want to take on.
That becomes more important as the company grows.
Maybe you spent the last few years doing $2 million projects and now you finally have an opportunity to bid a $6 million project. Or maybe your backlog has grown enough that your existing bonding program simply isn't enough anymore.
Now the strength of your balance sheet matters a lot more than it did a year ago.
And that is not something your CPA can know unless you tell him.
The Tax Return Isn't Always the Whole Story
There is an important technical point here.
Taking 100% bonus depreciation on your tax return does not necessarily mean you have to depreciate the equipment the same way on every financial statement.
A contractor may take accelerated depreciation for tax purposes while depreciating equipment over its useful life for financial reporting. Depending on what statements your surety requires, the effect of the tax deduction on your bonding picture may therefore be very different.
That is why the first question shouldn't be, “Will bonus depreciation hurt my bonding?”
It should be, “What financial information is my surety actually using?”
Some contractors may be providing tax-basis statements. Others have reviewed or audited statements prepared on another basis. The larger the bonding program becomes, the more likely the surety is to want stronger financial reporting and more information about the business.
You need to know what they are looking at.
Good Advice Can Be Bad When It Is Isolated
The problem is that the CPA was looking at one piece of the business.
Your banker may be focused on whether you can finance a purchase. Your bond agent is thinking about what the surety wants to see. Your insurance agent is looking at risk and protection. Each of them may be giving you perfectly good advice based on the part of the business they understand best.
But none of them automatically knows everything else you are planning.
That is why contractors need a team of advisors who understand where the business is headed, beyond the decision sitting in front of you.
Ultimately, someone still has to connect the dots.
Ownership Means Taking Ownership
Before taking a major write-off, talk to your bond agent.
Tell him what you are thinking about doing and ask whether it creates any issue with your current program or the additional capacity you expect to need.
Then bring that information back to your CPA.
The answer may still be to take the full deduction. In plenty of cases it probably will be.
But at least now you are making that decision knowing what else it affects.
The same principle applies far beyond depreciation.
Before taking on a big loan, think about how the additional debt affects the balance sheet your surety and bank are reviewing. Before distributing a large amount of cash to the owners, think about what that does to working capital. Before buying equipment, think about the cash, debt, tax and bonding implications together.
A decision can make perfect sense from one angle and still cause trouble somewhere else.
Your CPA has great tax insight, your banker knows how to get you financing, and your bond agent understands what the surety wants to see.
But only you see the whole picture.
Or you can hire a grea CFO to take ownership :)
