Tax depreciation rules can be complex, but developing a better understanding of them can yield significant tax savings for contractors. This article provides an overview of current depreciation rules as well as recent changes that both increase options to accelerate depreciation deductions and phase out some favorable opportunities. Repair Regulations The first step in this process is to minimize capital assets by expensing all items now permissible under the recent repair regulations. In 2013, the IRS released final regulations for tangible property costs (equipment, property, and other fixed assets), commonly known as the “repair regs.”1 Generally, the IRS requires most tangible property costs be capitalized and depreciated over several years rather than deducting the full amount in the current year. The repair regs provide the opportunity to immediately deduct certain items that would have previously been capitalized, like small tools and supplies, up to $2,500.2 Companies with an applicable financial statement (AFS) for the year – that is, an audited… read more →
As part of the American Jobs Creation Act of 2004, Congress passed the Domestic Production Activities Deduction (DPAD) permitting specific industries, including contractors, architects, and engineers, to deduct up to 9% of the net income of their operations. The deduction acts in part as an incentive for domestic production and to increase domestic jobs. This article is an updated and abbreviated version of a twopart series first published in 2006 on DPAD1 in an effort to bring attention to the potential importance and impact for contractors. Overview Businesses may claim a DPAD that is equal to a percentage of the income earned from specific production activities undertaken in the U.S., including manufacturing; food production; software development; film and music production; production of electricity, natural gas, or water; and construction, engineering, and architectural services. The DPAD equals the lesser of: 9% of the smaller of: The qualified production activities income (QPAI) of the taxpayer for the tax year; or Taxable income… read more →
Despite efforts to ensure communication is clear and contracts are effectively worded, contractors often face the possibility of disputes and claims. As a result, CFMs must be familiar with proper accounting for these issues. This article examines how disputes and claims are handled for tax purposes under the percentage-of-completion method (PCM). Contingent Compensation Generally, the Internal Revenue Code (IRC) and Treasury Regulations require contractors to report contingent compensation from disputes and claims as early as possible. A contractor that is involved in a dispute or claim must include the potential revenue when it is reasonably assured of receiving the contingent amount.1 Moreover, the regulations covering contingent compensation for long-term contracts reflect as fundamental criteria for being reasonably able to predict that the contingent income will be earned when it is reported for financial statement purposes under GAAP. IRC §460(b)(1) requires a contractor that uses the PCM to include all income not previously reported under the contract during the first taxable… read more →
Why would a shareholder of a closely held construction company owe the company money and have it show as a debit loan/receivable on the company books? Let’s consider some possible explanations: • The shareholder is using the corporate checkbook for personal expenses that are reflected as a loan; • The shareholder needs to borrow funds for acquisition of property and is using the company for the down payment. It may be business-related: For example, the down payment could be needed to purchase an owner-occupied property in which the construction company is located and is now paying rent; or • At the end of the year, distributions are reclassified to a receivable to ensure there were not distributions in excess of basis taxable to the shareholder. Regardless of the reason, money has left the company and a debit shareholder loan must now be addressed. This article will cover the tax issues associated with such loans, focusing on implications to S corporations… read more →
When an employee is sent to temporarily work at a location away from the home office, the contractor must pay for various travel, lodging, and incidental costs. In this type of situation, a contractor must determine what amounts are deductible to the company and what amounts (if any) may be taxable to the employee. This article will review the complex tax impacts of temporary work assignments to maximize the benefits to employers and employees. Basic Guidance What types of expenses are deductible as ordinary, necessary, and reasonable business travel expenses while traveling away from home? The IRS supplies the following list as basic guidance:1 Travel by airplane, train, bus, or car between the employee’s home and business destination. Fares for taxis or other types of transportation between the airport or train station and hotel, the hotel and the work location, and from one customer to another or from one place of business to another. Shipping of baggage and certain other… read more →
Most CFMs know about depreciation and the specialized rules that should be scrutinized to ensure all potential tax deductions are considered. A cost segregation study can help CFMs and property owners accelerate depreciation deductions, resulting in increased tax deductions and thereby increasing cash flow. This article will present an overview of the cost segregation study process and its potential tax benefits. Overview A cost segregation study is a financial and engineering study of new or existing properties or improvements to identify tangible personal property and other improvements that qualify for shorter tax depreciable lives. The study enables acceleration of federal (and sometimes state) income tax depreciation, which can result in federal income tax savings. Let’s consider an example: A business owner purchases or builds a facility for his or her operation that would be depreciated over 39 years. If a portion of the property can be depreciated quicker, then the owner’s taxes would be lower in the immediate future because… read more →
Accounting for income from construction contracts is not always easy or straightforward. Some methods can accelerate income, while others allow a contractor to legally defer income. As we review the options, consider three overriding issues: Is the construction contractor considered “small” for tax purposes? Is the contract short-term (i.e., started and completed during the tax year) or long-term? Does the nature of the work performed fall within a specialized category (e.g., residential or home construction contracts (HCCs))? If a contractor’s annual gross receipts average less than $10 million (based on the prior three years of receipts),1 then it is considered a small contractor. While a small contractor can choose which method it uses for regular tax purposes, it may want to use the completed-contract method (CCM) or the cash method to better match profit reporting to cash flow. Completed-Contract Method Under the CCM, profits from long-term contracts are reported when the contract is completed. In a typical scenario, if a… read more →