Is Your Company Strong enough for Bonding?

How to Determine if Your Company is Strong Enough for Bonding

If you are building a construction business, you will most likely want to bid on projects that require bonding. Public works projects especially require bonding to demonstrate your business is trustworthy and financially stable enough to take the project on, enough that a bonding company is willing to guarantee your performance. That presents a paradox for young businesses that lack the net worth and working capital to meet surety underwriting criteria. If they can’t meet the criteria, they can’t land profitable projects that require surety bonds. If they can’t land profitable projects, they can’t build the necessary net worth and working capital to qualify for surety bonds.

Contractors can break that vicious cycle by focusing on the key elements of their business that concern surety bond companies the most – working capital, equity, cash flow and work-in-process (WIP). Concentrate on improving those and you can effectively increase the bonding capacity of your company.

Working Capital and Equity

To sureties, your working capital is indicative of your company’s liquidity and its ability to fund its operations and service its debt obligations. The more working capital you can show on your balance sheet, the more bonding and licensing capacity you have. Equity is equally important as the surety typically factors in the lesser of the two when determining your bonding capacity. Licensing boards use these same criteria as well.

One way to quickly overcome the working capital and equity criteria is through an infusion of capital from management or an investor. A joint venture with a larger company could also help to increase your bonding capacity. In addition, restructuring debt could reduce the amount owed in the short-term and therefore increase working capital.

Cash Flow

Sureties know that one of the biggest cause of contractor job defaults is weak cash flow, specifically weak cash flow from operations. Maximizing cash flow is critical to increasing your bonding capacity. Central to that is your ability to effectively forecast cash flow and take steps to improving your company’s cash position through improved financial management and operational efficiency.

Work-in-Process

For a favorable review by a surety or a banker, your company must show a demonstrative track record of steady work that is accurately estimated and tracked. If your jobs consistently fade without reasonable explanations, the surety will assume that you do not know how to properly estimate job profit and therefore not give you fill credit for the working capital shown on your balance sheet. It is critically important to have the right systems and processes in place to accurately compute WIP, not just for the surety, but for your own information so that you can make decisions based on accurate reporting.

Have a CPA in Your Corner

Whether or not a surety requires that the financial statements be compiled by a CPA, having one that understands your industry and the specifics of project accounting can make a significant difference in how a surety views your business. Since most sureties require the financial statements to be audited, reviewed, or at least compiled by a CPA,choosing a CPA that understands the construction industry and its unique financial requirements is critical. The right CPA can help you create an overall financial picture for the surety.

Buying a Business?

What it Takes to Get to the Finish Line

Buying a business is one of the most complex transactions you will ever experience. The many and often varied steps leading up to the closing agreement are critical in determining which party walks away with the better end of the deal. From the time you decide on the business you want to buy, the process is a series of negotiations with both parties seeking the upper hand. You meet with the seller, make your opening bid and negotiate the key purchase terms. But that is all preliminary – simply the prelude to the real work of due diligence, submitting a formal offer, final negotiations, signing the purchase agreement and closing the deal. Not to diminish the effort that goes into the preliminary stage, because it can be very extensive, but nothing is real until a letter of intent is signed.

It Starts with the Letter of Intent

Once you and the seller agree to the broad terms of the deal, the next step is to have your attorney put it to writing in a letter of intent (LOI). A properly drafted LOI offers the buyer certain protections, such as restricting the seller’s ability to entertain other offers for a period of time. It should provide you with the time you need to thoroughly evaluate the company’s operations, financial statements, contracts, employee agreements, suppliers, pending litigation among other issues that could impact the purchase price. Although the purchase price is included in the LOI, it does allow for the buyer to question the assumptions and propose price adjustments and negotiate provisions based on changing assumptions or circumstances.

Getting to the Final Price

In most cases, the purchase price agreed to in the LOI is based on an EBITDA calculation of its earnings before interest, taxes, depreciation, and amortization. However, EBITDA is not a thorough measure of the business; rather, it is an acceptable starting point from which you can more thoroughly evaluate profitability and future returns. You can then apply various adjustments (add-backs and deducts) to arrive at “normalized earnings”. These adjustments are typically based on income or expense items currently included in the income statement that will not continue after the acquisition. Identifying these adjustments is vital to determining what you are likely to pay for the business. Typical adjustments include:

Owner salary and compensation: If the owner’s salary and benefits are deemed to be excessive when compared to market levels, an add-back for the excess would be appropriate. This could also include any family members receiving benefits who are not active in the business.
Owner-related expenses: Any non-essential items which the owner expensed through the business and are deemed excessive could be added back. These could include personal vehicles, travel, entertainment and memberships.
Unusual or non-recurring incentive compensation: The company’s income statement may be laced with large bonuses or other forms of incentive compensation that won’t be continued under the new owner. This could also include severance payments.
Management needs: Should the departure of the owner leave any gaps in the management team, requiring the new owner to fill the gaps, an adjustment should be made for the cost of hiring and compensating the new executives.
Rent expenses: If the seller owns the property housing the business as a separate entity, it may be charging above market rent. An adjustment should be made reflecting the true market rent. Conversely, if the company leases a building and pays under-market rent, and the lease is not assumable by the new owner, a similar adjustment can be made.

There are dozens of potential adjustments that could be made to EBITDA. It is vitally important not to miss items that could positively or negatively impact the purchase price. The normalized earnings calculation becomes the new starting point entering the final acquisition stage.

Your CPA Gets You to the Finish Line

Critical to the process of calculating normalized earnings is the buyer’s CPA firm. To conduct its part of due diligence, your CPA should have a minimum of three years of financial statements and tax returns, a copy of all material leases you expect to assume, a list of open receivables and payables, a list of all fixed assets you will be acquiring, payroll records and employee agreements.

Your CPA can evaluate all of these records in detail to evaluate their integrity and identify inconsistencies, improper record-keeping and mispriced assets. It is critically important to have any assets you expect to acquire to be confirmed. Are the company’s biggest assets actually owned by the company? Any significant assets that have been sold off in recent years could drop the purchase price. Some companies may try to misrepresent its asset register, listing assets that don’t actually exist or overstating their value. Your CPA will be able to challenge inventory value if it is outdated, damaged or otherwise unsalable.

In essence, your CPA puts you on the final glide path to successfully negotiating a fair price based on a clear and supportable evaluation while protecting your interests in the deal.

Thinking of Selling Your Business?

How the Deal Structure Can Impact the Sale

After all the painstaking time and effort it takes to build a business, it probably wouldn’t dawn on a business owner that selling a business could be as challenging as it is. The good news is there are primarily two ways to structure a sale – an asset sale or a stock sale. However, determining which one would be most beneficial requires a thorough evaluation of several factors. In addition, because buyer and sellers are impacted differently by tax implications, they tend to favor different structures. That can make it more difficult to structure a deal in which both parties walk away with everything they want. In considering the sale of your business, it would be important to understand how the two sale structures work and why a buyer or seller would prefer one over the other.

It Starts with Knowing How Much Your Business is Worth

Before moving too far along in determining how to structure a sale, it’s a good idea to know how much your business is worth. Ultimately, the sale price of any business is determined by the market and what a buyer is willing to pay for it; but, it would be important to put some numbers to it have a better idea of what they will be looking at. The most common way to measure your business’ potential value in a sale is by calculating its normalized earnings. The first step in this calculation is determining EBITDA, which is its earnings before interest, taxes, depreciation and amortization. Essentially, EBITDA is a measure of a business’s future earning capacity.

EBITDA is not a thorough measure of your business’s value, but it is widely accepted as a starting point for buyers and sellers to evaluate profitability and future returns. The more astute buyers look beyond EBITDA to focus on free cash flow and other factors. As a seller, you may want to make adjustments to your EBITDA value – such as adding tangible or intangible assets to the equation or by depreciating certain assets – to create a stronger representation of your business. At that point valuing your business based on EBITDA becomes more of an art than a science. Just know that your buyers will want to make their own adjustments.

Although any number of factors – the type of industry, the size of your market and its rate of growth, the uniqueness of your product or service, barriers to entry, gross margins, etc – can impact the value of your business, the average benchmark valuation for most small- to mid-sized businesses is 4-6X EBITDA.

Asset Sale vs. Stock Sale

Generally, buyers favor asset sales because they are able to depreciate the assets at a stepped-up basis. This gives them a stream of deductions they can use to offset revenues over time. They can also decide to exclude certain assets and purchase only what they need. In many assets sales, the buyer may buy equipment or technology and leave the business in the seller’s name. In an asset sale, the seller can also purchase assets without assuming the business’s liabilities. In those cases, the seller may be left with cash and/or accounts receivables over remaining liabilities. The benefit to the seller is the buyer may value the business or the individual assets more with an asset sale. However, the seller winds up paying ordinary tax rates on “hot assets”, such as accounts receivable and inventory; however, the seller does receive capital gain tax rates on the sale of fixed assets.

Generally, a stock sale is less complex than an asset sale because it is done in single, straightforward transaction. The buyer simply acquires all of the entire legal entity, including the assets, liabilities, and rights of the business.

A stock sale can be beneficial for a buyer who wants to continue the operation of the business without disruption. However, the contingent liability issue tends to push more buyers towards an asset sale. A stock sale tends to favor sellers more than buyers. For one, the seller realizes a more favorable capital gains tax in a stock sale. They may have to accept a lower price for the business, but they typically pay significantly less in taxes.

Plan Well Ahead Don’t Try to Go it Alone

As you can see, the structure of a business sale can impact the buyer and the seller in different ways. However, there are many other factors that can also influence the decision as to which structure is ultimately chosen. If you are contemplating the sale of your business, it would be important to consult with your advisors early in the process to carefully consider the implications and understand the issues before making any decisions.

The Impact of IRC Sec 460 on Contractors’ Cash Flow Management

At nearly 75,000 pages the Internal Revenue Code is the bane of most industries, but none more so than the construction industry which has a whole section of the code targeting its accounting procedures. IRC Section 460, created in 1986, is as complex a section as there is, especially where it concerns the treatment of income from long-term contracts. However, for construction contractors who take the time to understand the intricacies Sec. 460, there are many tax planning opportunities to be found which can substantially improve their cash flow situation.

IRC Section 460 Treatment of Long-Term Contracts

Sec. 460 establishes the methods by which taxpayers must treat income generated from long-term contracts. Generally, it requires that contractors working with long-term contracts (contracts not completed within the tax year of origination) use the percentage-of-completion method to determine when the taxable income is to be recognized. Essentially, the method calculates the cumulative percentage of the contract that is completed and comparing allocated costs to costs incurred before the end of the tax year to come up with a ratio. The ratio is multiplied by the contract price to determine how much income is to be recognized in a given accounting period.

Exceptions to the Rule

The obvious disadvantage of the percentage-of-completion method is that it requires the payment of taxes on income that has yet to be received. However, as with many other provisions of the tax code, there are exceptions to the rule. Sec. 460 does include several exemptions which, if eligible, would allow contractors to change their accounting method resulting in a deferral of income recognition until the contract is completed. The completed-contract method would be preferable to all contractors, but it can only be triggered if certain parameters are met. Here are some examples of when contractors would be exempt from the percentage-of-completion method

Small contractors: Contracts that are expected to be completed within two years and the contractor’s average annual gross income is less than $10 million for the past three tax years.

Home construction: Contracts in which at least 80% of the estimated cost is going to the construction of a building with four or less dwelling units.

Residential construction: Contracts for the construction of buildings containing five or more dwelling units (except for hotels or motels), are allowed to use a hybrid accounting method where 70% is reported under the percentage-of-completion method and 30% is reported under the completed contract method.

Incomplete construction: Contracts that are less than 10% complete at the end of the tax year are allowed to defer income reporting into the next year.

Contract retainage: Contracts started and completed in the same year, but that include retainage, may defer reporting of the retainage income until the contract is completed.

These are just a few examples of how provisions of Sec. 460 can be used to improve your cash flow. However, it is critically important to note that utilizing any of these methods could require a change in your accounting method. Once you change your accounting method, you are required to use it going forward. It would be important to work with your accountant to assess your overall tax and cash flow situation to determine the cost-benefit of any changes.

Tennessee’s IMPROVE Act Strikes Balance in Raising Critical Road Funds

When most states raise gas taxes, it typically unleashes a storm of protest and controversy, especially when the increase hits businesses and lower income people the hardest. But when Tennessee Gov. Bill Haslam signed the state’s first gas tax hike since 1989 into law on April 24, it was celebrated as the greatest tax overhaul in the state’s history.

The law does, in fact, raise taxes on gas by six cents and diesel by 10 cents over the next three years, an increase aimed at tackling a $10 billion backlog in infrastructure projects. However, the law simultaneously reduces taxes on groceries, businesses and investment earnings from stocks and bonds. In addition to much needed road improvements, the law, known as the IMPROVE Act literally offers something for everyone.

Much Needed Funds for Infrastructure Repair

The primary objective of the IMPROVE Act, which stands for “Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy,” is the backlog of 962 infrastructure projects in 95 counties, which, without the additional revenue would take 20 to 30 years to complete. The additional tax revenue is expected to accelerate project completions by 10 to 15 years.

Offsets for Grocery Shoppers…

While most Tennesseans welcome the initiative to improve roads and bridges, there were big concerns that the fuel tax increase would create a hardship on the state’s more vulnerable citizens. That’s why legislators sought to strike a balance with those tax hikes by cutting sales taxes on groceries from 5 percent to 4 percent. Whereas the gas tax increase is expected to cost the average family an additional $5 a month, the reduction in food taxes will save them $7 a month.

…and Low-Income and Veteran Homeowners

The legislature took it even further by including a property tax credit for qualifying low-income residents and veterans with disabilities. For the state’s veterans, the new law reinstates provisions in the program that exempted those with a “total and permanent” disability from paying property taxes on up to $175,000 on their home value. Due to the overwhelming number of applicants, the state instituted an income requirement, effective lowering the property tax exemption to $100,000. Veterans advocacy groups led the charge to have the income requirement eliminated and legislators took the opportunity with the IMPROVE Act to do just that.

A Smart Legislative Accomplishment

Not everyone is appeased by the give and take of the law. There are some groups insisting that it doesn’t go far enough to protect the state’s most vulnerable citizens. The Concerned Veterans for America accused lawmakers of using the property tax cuts for veterans as a cover for the devastation the law will have on people who count on affordable transportation. No law asking its citizens for more money is going to please everyone. However, most Tennesseans are anxious to see that state pull its infrastructure out of a spiral of disrepair due to lack of funds. The IMPROVE Act goes as far as any law can to take the sting out of a gas tax increase.

Tax reform. It’s all in the Details.

Tax reform would be easy if it was only about BIG ideas. Unfortunately, when it comes to taxes, the devil is in the details. Currently, details seem to be holding up the idea of making tax reform real.

One of the key priorities of the Trump campaign was tax reform. Many debated whether it would — or should — be one of the top issues the administration would take on in its first one hundred days in office.

Instead of tax reform, it placed its initial bets on health care reform and taking on immigration issues. And while changes to healthcare have significant tax implications for individuals and businesses, the tax-related details included in the initial health care plan supported by Trump were scarce. This was an issue with Trump’s initial budget proposal, as well. It recommended significant cuts to services paired with increases in defense spending, yet was light on detailed information about tax revenue reductions or increases.

So far, the A Better Way plan from the House of Representatives, backed by Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady, has been the only significant blueprint for tax reform put forward recently. It advocates for three key things:

  1. Simplicity and fairness. The goal of the plan is to transform the tax code into something simpler, fairer and flatter. The reason for this is to make it easier for people to do their taxes and feel more confident that they’re getting them right. This will help them more accurately plan for their futures.
  2. Jobs and growth. The plan proposes ways to make it easier for businesses to create jobs, increase wages and expand opportunities for workers to find jobs. (This is good news for contractors and other small business owners.)
  3. A shift at the IRS. Another goal of the proposal is to transform the IRS so it provides a higher level of service to taxpayers.

One of the key sticking points about the proposal that has been extensively discussed is related to border taxes. The plan proposes to eliminate them for exports and maintain them for imported goods sold domestically.

This provision could have a significant impact on the economy overall and on business owners who depend on imported goods in their business dealings. (This could be a big issue for contractors who need to use imported materials on the job.) In addition, many in Congress are concerned that this aspect of the plan could provide greater long-term benefits to corporations rather than smaller firms, which would be unpopular with voters.

Further discussion about this – or any – tax plan has been pretty much drowned out in the House by other issues, including healthcare, Russian tampering in the election process, getting Cabinet positions filled and more.

The Senate is running behind the House when it comes to tax reform. This slower, more deliberative body has discussed the topic, but does not have a solid proposal for members to coalesce around.

The Trump administration is nearing the close of its first hundred days in office, and it seems unlikely that it will use its remaining political capital to actively pursue tax reform (although considering its unpredictability, this could happen).

So, what’s next when it comes to filling in the details of a future tax reform plan?

Once some of the current hot issues Congress is dealing with begin to settle down, the House will probably return to considering the A Better Way plan. It is likely that it will be passed by the body with some refinements to address the border tax concerns.

It will then move to the Senate, where it will again be refined, adding more defined and detailed provisions for things like:

  • A corporate / business tax reduction
  • An individual / personal tax reduction, especially for working families
  • Changes to taxes on overseas earnings.

It is also possible that in order to get passed, the final tax plan will be based on artificially high revenue projections and a near-term increase in the deficit. Both of these factors could have significant negative economic and market impact if they’re not monitored and managed carefully. This is something contractors and other business owners should be aware of as they consider their long-term growth prospects.

Next, the proposal would go into conference late in the summer and be passed sometime in the fall. As of today, many of the details about tax reform have still not been discussed, much less worked out. That’s why it’s critical for individuals and business owners to stay alerted to changes ahead.

We’ll continue to provide our clients with information as we find out more. You can feel free to contact us at any time to discuss how the details of tax reform could impact you and your business in the future.

10 Tax Breaks Contractors Often Miss

Check it out: 10 tax breaks contractors often miss.

Beyond owing money to the IRS, one of the biggest causes of tax anxiety for contractors is missing out on deductions. After all, you deserve every break you have coming from Uncle Sam.

Check out these often missed opportunities to lower your tax bill. Taking advantage of them could help you save thousands of dollars now and in the years ahead.

1. Home office deduction. Do you run your contracting business out of your home? You could be entitled to a deduction if you use a dedicated space to do so. Many business owners don’t take this deduction because they believe it triggers audits and other IRS-related issues. (Data doesn’t support this myth.)

Rules about this deduction have been simplified in recent years and the IRS now offers an easier way to take it. If you’re unclear about whether you qualify, or the best way to calculate your deduction, turn to an experienced tax expert for guidance.

2. Start-up costs. If your business is new, you can deduct up to $5,000 in start-up expenses and $5,000 in organizational costs from your taxes. If your totals are higher than this (up to $50,000, with certain limits), you could amortize those costs and write them off for a period of up to 15 years.

3. Inventory. Did you know, within certain limits, you can use the cash method of accounting to deduct current inventory items from your taxes rather than waiting until they are used on a job? This can be a great way to improve cash flow.

Be aware: The rules around this are extremely strict and particularly complex for contractors. You must file paperwork to qualify for the deduction. Only standardized off-the-shelf or manufactured items qualify. (Anything customized for a particular client is not allowed.) An accounting firm experienced in working with contractors can advise you on whether shifting how you account for your inventory is a smart move for you.

4. Business equipment. Most business owners are aware that they can deduct certain types of equipment from their taxes. This is a great benefit for contractors, who depend on a lot of expensive tools and vehicles to do their work. The good news is that Section 179 of the tax code has been extended after a period of uncertainty. That means certain types of equipment, within limits, can be deducted from taxes as a current year expense rather than amortized over a period of time.

Many types of equipment are covered under the rule, including certain types of software. The qualifications associated with section 179 are complex, but it’s an opportunity worth discussing with your tax advisor.

5. Research and development costs. Most contractors don’t think of themselves as “researchers.” That’s a term reserved for scientists working in labs. The truth is that if you develop an original way of doing contracting work, or a new tool or product to get a job done, you may be able to write off some of the costs associated with creating your “invention.”

Also, this credit is retroactive, which means that if you did this type of activity in the past and didn’t take a deduction, you still may be able to. The tests associated with the research and development credit are challenging, but leveraging it can really pay off. An expert can guide you through the process.

6. Bad debts. Contractors often make loans. Examples include advancing money to employees to purchase tools and equipment or subcontractors to get established in business. Unfortunately, loans sometimes don’t get repaid. Did you know you may be able to deduct the value of an unpaid loan as a bad business debt? It won’t return all the money to you, but it will reduce the impact on your bottom line.

7. Bank fees. Bank charges really add up. However, most of the fees associated with your business banking activities can be written off. This is one of the most basic tax opportunities business owners miss.

8. Education expenses. Contracting is an ever-changing field. It can be tough for your employees to keep current. The IRS offers opportunities for you to help your employees learn new things that could make them better and more efficient workers.

These programs can be structured as reimbursement or educational assistance programs. You and your employees may both qualify for a write-off. Be aware that, as is the case with most things the IRS does, this deduction comes with a complex array of qualifiers. If you’re interested in helping your employees further their educations, a tax advisor can work with you to structure a compliant program.

9. Mileage. Contractors spend a lot of time in their vehicles, driving to work sites, suppliers and client meetings. You can deduct mileage and other expenses (insurance, repairs, etc.) when you use your vehicle for work purposes. The IRS offers a number of options for calculating this, and you owe it to yourself to take the time to select the best option for your personal tax situation.

10. Tax preparation fees. We often recommend that contractors work with an experienced accountant or tax preparer to optimize their tax situation. To many, it seems counterintuitive that you have to pay someone to reduce your tax bill.

The IRS offers some relief for these costs. Some of the fees associated with working with a professional to prepare last year’s taxes can be deducted from your current year taxes.

These are just ten of the most common tax write-offs contractors forget to (or don’t know they can) take advantage of. Depending on your individual situation, there could be countless others you might be missing. Contact us today. We’ll take a fresh look at your taxes to find opportunities to lower your tax bill.

Trump Tax Moves That Could Drive Growth

First 100 Days

Now that President Trump is in office, it’s time for his administration to address what it can do to help small- to mid-sized business owners grow their operations and workers to find new and better employment opportunities. The core of the new president’s voter base was made up of people within these groups and it’s time to pay-off the promises he made to them.

If Trump makes good on what he campaigned on, his administration will likely push for expanding the business- and worker-friendly tax incentives and making it easier to take advantage of them. While it will take time to complete broad-based tax reform, here are four ideas that would be relatively easy to move through Congress, maybe even within the first one hundred days of the new administration.

1. Lower business tax rates.

While it’s more likely that lowering taxes for businesses will be part of a broader tax restructuring initiative that could take years to complete, it would be a dramatic statement if the new administration and Congress took on this issue immediately. A small incremental business tax reduction now could do a lot to jump-start business and hiring activity here in Tennessee and throughout the United States.

2. Significant tax credits to encourage business owners to offer employee stock ownership and revenue sharing programs.

Studies show that one of the best ways to drive improved worker performance and engagement is to offer employees a meaningful stake in the companies they work for. People work harder and are more productive if they know it will pay off for them in the long term. This type of incentive can come in the form of owning a piece of the company they work for or sharing in its profits.

Some companies, especially larger ones in the financial and professional services industries, have offered these incentives for decades. However, these programs have not expanded broadly into fields like contracting, because there’s been limited governmental support and the tax rules related to them are among the most complex in the federal tax code. They’re far too complicated for the typical small- to mid-sized contracting business to navigate and leverage effectively.

If President Trump wants to provide meaningful incentives to businesses and their employees, taking on this issue could be a good place to start. It aligns closely with his pro-business, low-tax stance and it would be relatively easy to isolate outside the broader tax overhaul project.

Would you like to get started today? If you’re interested in improving employee performance by offing them company ownership or profit-sharing opportunities, an experienced tax expert can help. We’ll work with you to set up an effective employee profit-sharing program now and help you make adjustments to it as tax rules change.

3. Research and development tax incentive expansion.

One of the top ways for companies to grow, allowing them to hire new employees and provide more opportunities for current ones, is by doing research and developing new products and services. It can help contractors stand out — and rapidly advance their position — within their marketplace.

While the concepts of “research” and “product and service development” may seem daunting, they actually represent a broader array of activities than most contractors are aware of. Many things, including developing certain types of software, creating new construction products and tools and coming up with novel ways of doing contracting work can qualify.

Similar to the tax incentives for employee company ownership and revenue sharing discussed in the previous section, the current credit for research and development isn’t as robust as it could be and it’s complicated to navigate the rules associated with it. The maximum benefit a company can today claim against payroll taxes is $250,000 (significant, but not big enough to cover many contracting-related research and development projects) and the tests required to prove the validity of a tax claim by a contracting firm are extensive.

Check out our overview of how research and development tax credits can be used by contractors.

This is another area where simplifying the tax rules and raising the limits to meet global standards could help drive business growth and hiring in the United States.

Did you know: The research and development tax credit can be claimed for the current year or retroactively? Despite the regulatory complexity, doing so can really pay off for contractors. An experienced tax advisor can help your firm take full advantage of it and keep you updated on changes.

4. Higher education opportunities.

Most people agree that education provides the best path for people to get ahead. It gives owners of companies the knowledge they need to take their businesses to the next level and workers the skills required to advance their careers.

However, today’s education tax credits are a hodge-podge targeted to people with children in private schools, new college students, and adults interested in continuing their educations. They must be balanced against educational grant opportunities, which are often based on income levels. As most people are aware, income levels are affected by taking advantage of tax credits, which makes finding the right balance and mix very complex.

One of the most popular things the Trump administration could do right away is address the educational incentive mess. After all, voters throughout the presidential election process — including those who supported Sanders, Clinton, and Trump —expressed interest in reducing the cost of higher education. Finding a way to do this could be a way to bring together an electorate that finds it hard to agree on almost anything.

Without a doubt, tax regulations are likely to change faster and more dramatically than they have in decades. Feel free to contact us anytime you have questions about your current or future tax situation.

Trump’s Tax Plan

Is the Trump tax plan a done deal?

Or just the beginning of negotiations?

Now that Donald Trump has been elected President, many people are speculating on the impact the Trump tax plan will have on personal and business taxes. Since the new President is backed by a Republican-majority Congress, many want to know if this tax plan is a done deal.

Let’s take a look at how the Trump plan could impact the personal and business finances of business owners and whether it’s likely to be passed quickly “as-is” or if it could change during an extended negotiation and approval process.

How taxes work

Let’s start by looking at how taxes are proposed, negotiated and put into effect. Many people believe that the government budgeting process is a simple one: Dollars come in from taxes and they’re spent by the government to provide services such as infrastructure development, national defense and social services.

However, the reality is much more complex. The government often uses taxation as a way to control the economy (an objective of the Trump plan). It sometimes cuts specific types of taxes among certain segments of the tax base to pump money into designated sectors of the economy to stimulate growth. Conversely, the government may increase certain taxes to slow an economy that’s expanding too rapidly or to reduce asset bubbles.

At the foundation of all this spreadsheet and economic complexity is a congressional budget mandate that any tax cut must be offset with a corresponding reduction in spending. A lot of back-and-forth negotiation and deal-making takes place before a tax proposal becomes law:

  1. A new tax plan can be recommended by the President, members of Congress or as part of a broader budget or spending proposal.
  2. In order for a plan to move forward, a tax bill is initiated by the House of Representatives and reviewed and debated by members of its Ways and Means Committee. When members of this committee reach agreement on the bill, they translate it into a law.
  3. The law goes from the Ways and Means Committee to the full House, where it is debated, possibly amended, and eventually approved.
  4. Next it moves to the Senate, where it is reviewed by its Finance Committee. There is a good chance that it could be revised or rewritten. The committee’s version is then presented to the full Senate.
  5. Once the Senate approves the tax legislation, it is sent to a joint committee made up of members of the House and Senate. They go through a negotiation process to arrive at a compromise version of the new tax law.
  6. The compromise version goes to both the House and the Senate for approval.
  7. Once the tax legislation is passed by Congress, it goes to the White House, where the president can either sign it into law or veto it.
  8. If the president decides to veto it, Congress may attempt to override the veto. This takes a two-thirds vote of each house, which is difficult to achieve during partisan political periods.

Clearly, getting tax legislation passed is a difficult and time-consuming process.

The Trump plan: Personal taxes

At the foundation of the Trump tax plan is a proposal to simplify the personal income tax code by reducing the number of tax brackets. This change in personal income taxes may have a significant impact on business owners. It could increase the amount of money they have available to invest in their businesses. The following tables illustrate how this simplification process could play out:

Current tax brackets:

Tax bracket Filing single Head of household Married filing jointly
10 percent $0-$9,275 $0-$13,250 $0-$18,550
15 percent $9,275-$37,650 $13,250-$50,400 $18,550-$75,300
25 percent $37,650-$91,150 $50,400-$130,150 $75,300-$151,900
28 percent $91,150-$190,150 $130,150-$210,800 $151,900-$231,450
33 percent $190,150-$413,350 $130,150-$210,800 $231,450-$413,350
35 percent $413,350-$415,050 $413,350-$441,000 $413,350-$466,950
39.6 percent $415,050+ $441,000+ $466,950+

Proposed tax brackets:

Tax bracket Filing single Head of household Married filing jointly
12 percent $0-$37,500 Same as single filer $0-$75,000
25 percent $37,500-$112,500 Same as single filer $75,000-$225,000
33 percent $112,500+ Same as single filer $225,000+

Source: Tax Policy Center

Based on an analysis on the Trump tax plan, coupled with the simplification process, personal income taxes would be reduced, on average, by approximately two percent. The top 0.1 percent of earners would receive a roughly seven percent tax reduction while those in the lowest brackets would receive a less than one percent cut.

This table provides a breakdown of how the reductions could impact people at different income levels:

Income percentile Current tax rate Proposed tax rate Reduction
Bottom 20 percent 2.3 percent 1.7 percent -0.6 percent
Second 20 percent 15.6 percent 14.9 percent -0.7 percent
Middle 20 percent 19.2 percent 17.5 percent -1.7 percent
Fourth 20 percent 20.1 percent 18.5 percent -1.6 percent
Top 20 percent 31.1 percent 27.9 percent -3.2 percent
Top 1 percent 38.8 percent 32.3 percent -6.5 percent
Top 0.1 percent 39.5 percent 32.2 percent -7.3 percent

Source: Tax Policy Center

According to tax policy experts, certain groups could expect their taxes to increase under the Trump plan:

  • Single parents earning $75,000 per year who have two school-age children and no child care costs could expect to pay approximately $2,400 more in taxes.
  • Single parents earning $50,000 per year with three school-age children and no child care costs would see their taxes go up by almost $1,200.
  • A married couple earning $50,000, with two school-age children and no child care costs could experience a tax increase of about $150.

The tax increase results from the fact that the Trump plan eliminates the $4,000 exemption for each person in a household.

Other groups, especially those dependent on professional child care, could see their taxes reduced:

  • A married couple that earns $50,000 per year with two children and pays $8,000 in child care expenses would experience a 35 percent reduction in taxes.
  • A married couple earning $75,000 annually with two children that has $10,000 in child care expenses would enjoy a 30 percent tax cut.
  • A married couple that brings in $5 million a year with two children and $12,000 in child care expenses would see a three percent cut.

One other benefit to business owners and other high-net-worth individuals that’s included in the Trump plan: It would completely eliminate the estate tax, which is currently only paid by the top one percent of taxpayers.

The Trump plan: Business taxes

As it currently stands, the Trump tax plan will reduce the business tax rate from 35 percent to 15 percent. At the same time, it will eliminate the corporate alternative minimum tax. According to the Trump campaign website, the reduced tax rate will be available to both large and small businesses across the United States.

The plan also provides for a repatriation of corporate profits held offshore at a one-time tax rate of 10 percent. This is designed to move offshore assets back into the United States.

In addition, the Trump business tax plan eliminates most corporate tax deductions and credits, except for the Research and Development credit. Also, companies doing any type of manufacturing (broadly defined) in the United States may choose to expense capital investment and lose the opportunity to deduct corporate interest expense. A business that decides to do this can change the decision within three years. If the decision is reversed, prior year tax returns would need to be updated based on the new status. After three years, the decision is final and can’t be changed.

Similar to the Trump personal tax plan, the business proposal is supportive of families who are dependent on professional childcare. The annual cap for the business tax credit for on-site childcare would increase to $500,000 per year, up from $150,000. The recapture period would be lowered to five years from ten.In addition, under the plan, businesses that contribute to paying an employee’s childcare expenses can exclude these contributions from income.

What to expect

It’s hard to predict which portions of the Trump tax plan will be approved by Congress and when it would take effect. The plan (which is still lacking significant details) must be fleshed out and go through the approval process outlined above. By comparison, the Bush tax cuts took approximately two years to be approved by Congress, and they were based on more research and a completely developed plan.

With all the uncertainty surrounding the Trump plan, it seems unlikely that the Trump tax proposal will be passed quickly or in its current form. We’ll continue to provide you with information on the progress of this proposal and steps you can take to plan for personal and business tax changes ahead.

As always, feel free to contact us any time you have questions about your tax situation today or in the future.

The Hall Tax

What changes to the Hall income tax mean for Tennessee taxpayers

The Hall income tax is a Tennessee state tax on interest and dividend income from investments. It’s the only form of personal income tax in the state. It’s been in the news lately because, after years of discussion, there’s now a plan to slowly roll back the tax until it’s eliminated in 2022.

The History

The Hall tax has been in effect since 1929 and was named after the state senator who sponsored it. The original tax rate was five percent and all revenue at the time went to the state government. In 1931, the law was changed, and the state began sharing 45 percent of revenue with local governments.

In 1937 the tax rate was increased to six percent and the portion allocated to local governments was reduced to 37.5 percent of total revenue, where it stands today. The Hall income tax accounts for only about two percent of Tennessee’s state tax collections. The local government portion goes to the municipality where the taxpayer lives and there are no restrictions on how local governments use the funds.

Although these payments are a relatively minor source of revenue for most local governments and the state, it is a big source of income for a few small municipalities, especially those with wealthy residents. This is one of the reasons many in the state consider the tax unbalanced and unfair.

Who Pays?

The Hall tax applies to people whose legal residence is in Tennessee, including anyone who lives in the state at least six months a year. It taxes interest and dividend income over $1,250 per person and $2,500 for married couples that file their taxes jointly. There are certain limits on this tax for people who are over 65 and those with handicaps.

Dividends subject to the tax include those from:

  • Corporations
  • Investment trusts
  • Mutual funds

Taxable forms of interest include interest on:

  • Bonds issued by corporations, churches, joint stock companies and business trusts
  • Bonds issued by U.S. states and local areas outside Tennessee and foreign governments
  • Mortgages, commercial paper, and other written obligations that mature more than six months after the date of issue

The tax does not apply to:

  • Income from bonds issued by the U.S. government and Tennessee state or local governments
  • Dividends from stock from banks and similar financial institutions
  • Income from investments in certain types of Tennessee businesses
  • Interest paid on bank and credit union accounts.

Changes Ahead

The Hall income tax has been under fire for a long time. Many in the state feel it’s regressive and may have a negative impact on retired people. There have also been concerns that the tax keeps wealthy people from moving to Tennessee. They often choose to live in states in the region with more favorable tax policies for wealthy investors.

Over the years, there have been countless legislative proposals for changing or eliminating the Hall tax. This year, the legislature passed a bill that reduced the Hall tax rate from six percent to five percent for tax year 2016. The bill also somewhat ambiguously states that it is the “ intent” of the legislature to reduce the tax by one percent annually beginning next year. The certain thing about the bill is that it will eliminate the tax entirely in 2022, whether the incremental annual reductions take place or not. If this happens as planned, Tennessee will become one of seven states with no state personal income tax in 2022.

The Impact

According to experts, when the tax is completely eliminated in 2022, it could put more than $5,000 per year back into the pockets of the top one percent of Tennessee residents in terms of income. It’s expected that a percentage of this will be spent or invested in the state, which will generate new tax revenue to replace some lost by the repeal.

Over time, it’s expected that this change will attract more wealthy residents to the Tennessee, who will in turn invest in the state and local communities. Long term, many believe that this will have a big enough impact on the amount of revenue generated in the state that can be taxed to more than make up for the two percent of tax income the state will lose because of the Hall tax repeal.

An experienced tax advisor can answer any questions you might have about the elimination of the Hall tax and how it could affect your personal or business tax situation.

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