Author: dsp64

Paycheck Protection Program

Posted on by dsp64

The Art of Accounting

Our FAQ section briefly describes possible approaches to account for loans received under the Paycheck Protection Program (“PPP”). This article will go into a bit more depth.

To address the economic issues caused by the COVID-19 pandemic, the CARES Act, signed into law on March 27, 2020, established the PPP to provide loans to qualifying businesses to pay up to 8 weeks of certain qualifying expenses. The PPP Flexibility Act, signed June 5, 2020, extended the pay period to 24 weeks. Qualifying expenses include payroll costs, including benefits, mortgage interest, rent, and utilities. The SBA administers the program. Under the program’s provisions, the loan and interest may be forgiven, provided the business meets the eligibility criteria for forgiveness.

The program intends to keep employees employed, and the doors open for business. And, by doing so, the loan and interest are subject to forgiveness by the SBA. So how does a for-profit business entity account for the loan? And when and how do you recognized the income if the loan is subsequently forgiven?

Most CPAs who have practiced accounting for some time realize that financial accounting is more art than science. Math is a science, but accounting is not math. Generally accepted accounting principles (“GAAP”), certainly for the last several years, are not a list of specific rules, per se. To a large degree, it is broad principles applied to the facts and circumstances fairly and consistently. When we say consistently applied, it means the same company consistently uses the accounting principle from period to period. It does not mean that GAAP is applied consistently across all companies. Therefore, it’s possible and acceptable for one company to account for a transaction one way, and another company to account for a similar transaction another way with different results. Because of numerous accounting elections available to account for a PPP loan, companies may present a similar transaction differently and still comply with GAAP.

The Financial Accounting Standards Board (“FASB”) is the organization responsible for establishing accounting and financial reporting standards in the United States. In other words, it determines GAAP. It has issued numerous authoritative pronouncements over the decades. Yet, none of the pronouncements seem to adequately address the accounting for a non-governmental business entity that receives an SBA forgivable loan if specific requirements are satisfied. That leaves us to look to other sources for guidance.

The AICPA, in its Q&A Section 3200.18, notes that while the legal form of a PPP loan is debt, in substance, it could be construed as a governmental grant. Q&A Section 3200.18 outlines the following nonauthoritative approaches to account for a PPP loan:

  1. Debt. The legal form of the funds is that of a debt. So, it is always permissible to account for the PPP loan under FASB ASC 470 – Debt. Our impression is that most companies will account for the PPP loan as a debt, even if it expects the debt and interest to be forgiven. If the stated interest rate is below market, interest will not be imputed because government-guaranteed obligations are excluded from this requirement. Under further guidance in FASB ASC 405-20-40-1, the loan remains recorded as a liability until it is paid off or forgiven, either in whole or in part. If forgiven, the debt liability is reduced by the amount forgiven, and gain on extinguishment of debt would be recorded.

    This approach’s appeal is twofold: a) The legal form of the funds received is debt; it is an SBA loan. b) It removes the requirement of estimating if it is probable the SBA requirements for the forgiveness of debt will be met. (See #2 below). Under the debt method, gain recognition and debt derecognition are postponed until the accounting period the loan is forgiven (i.e., legally released).

  2. Deferred Income Liability. If the company estimates that it is probable it will meet the PPP’s eligibility criteria for loan forgiveness, it may conclude that the loan is, in substance, a government grant. Therefore, it may account for the PPP loan as a grant by analogy to the provisions of International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance (“IAS 20”). Bear in mind, though, that the likelihood of forgiveness must meet the probable threshold under GAAP, a high bar to reach. The standards define “probable” as a future event or events that are likely to occur. While no percentage threshold is given in authoritative accounting standards, in practice, many CPAs consider a 75% or greater likelihood of occurrence as necessary to meet the probable requirement.

    Under the IAS 20 model, the PPP loan funds are initially recorded as a deferred income liability. The liability is reduced as income is recognized “on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.” In other words, as qualifying expenses are incurred during the 8 or 24-week period, an equal amount of income is recognized.

    Under IAS 20, the PPP income is presented in the statement of income as either:

    1. A separate caption or under a general caption such as Other Income, or
    2. As a reduction to the related expenses.

      Many companies present income from operations on its statement of income. Under option #1 above, the company’s accounting policies determine if PPP income is included in operating income. However, if the company elects to net the income against the related expense, as described in option #2 above, then the PPP income would necessarily be included in operating income.

      We expect that most companies who choose the IAS 20 model would elect to present PPP income as either a separate caption or under a general caption such as Other Income, as described in #1.

      If all or a portion of the previously recognized income is deemed repayable in a subsequent accounting period, it will be accounted for prospectively as a change in estimate.

  3. Refundable Advance. Suppose a business entity anticipates complying with the eligibility criteria and expects the loan to be forgiven. Another acceptable approach would be, by analogy, to follow the not-for-profit model (“NFP model”) described in FASB ASC 958-605-25-13. Under the NFP model, a conditional contribution is “…accounted for as a refundable advance until the conditions have been substantially met or explicitly waived by the donor.” Therefore, the SBA loan would be carried on the balance sheet as a refundable advance until the criteria for forgiveness are substantially met or explicitly waived. At that time, recognize the refundable advance as income.

    When are the criteria for forgiveness substantially met? Is it:

    • When the qualifying expenses are incurred?
    • When the company submits all required documentation to the lender for forgiveness?
    • When the lender submits approval of the application to the SBA?
    • Or, when the SBA remits payment to the lender?

    The point in which the criteria for forgiveness are substantially met is not entirely clear, and there will probably be diversity in practice. For this reason, we believe few business entities will follow the NFP model to account for PPP loans.

  4. Gain Contingency. Another method a business entity may elect, if it expects the loan to be forgiven, is by analogy to the gain contingency recognition model presented in FASB ASC 450-30. Under this model, the loan proceeds are recorded as a deferred income liability. Grant income will not be recognized until the period when the grant proceeds are realized or realizable. This will probably not be until the lender approves the company’s application for loan forgiveness.

    We think few businesses will use this model. If management is inclined to wait until forgiveness to recognize the grant income, they will use the debt model instead.

Regardless of the approach taken to account for the PPP loan, all companies must adequately disclose its accounting policy and its implications to the financial statements.

The Good Liability?

Posted on by dsp64

The Upside Down

If you are a fan of the popular Netflix science fiction horror series Stranger Things, then you are familiar with The Upside Down. For those who are not acquainted with the series, The Upside Down could be described as an alternate parallel dimension that is not too human friendly, to say the least.

The world of construction accounting is viewed by many as somewhat of an upside-down, with a strange language consisting of such terms as POC, under billings, overbillings, ASC 606, phase codes, related parties and, worst of all, though certainly not unfamiliar, income tax.

The first U.S. income tax was passed in 1861 and signed into law by Abraham Lincoln to fund the war against the southern states. It began as a flat tax of 3% on incomes above $800 and because the war lasted longer than expected by the Union, was later modified to a progressive tax structure. It was repealed in 1872. Our present income tax system was set in place in 1913 with the ratification of the 16th amendment to the U.S. Constitution.

The history of U.S. income taxation began with a national struggle, and to this day continues to be a struggle. The federal tax code and regulations are complicated and confusing. Convoluted by special interest lobbying, made difficult with programs to correct economic and social issues, replete with governmental spending disguised as tax cuts, and made more incomprehensible by well-meaning attempts to infuse fairness into the code, it has increasingly become not too human friendly.

However, when the fog lifts just a bit, one thing is clear: it is better to legally push the payment of income taxes as far as you can to the future. And then push it some more. The more distant the tax horizon, the better. There are exceptions, of course, but in most cases, you want to pay later, not now. Fortunately, construction contractors have several powerful tools available to defer income tax liabilities. The result of a skillful use of these tools creates a liability on your balance sheet called deferred income tax liability (“DTL”). A DTL is one of those rare “good liabilities”.

It is true that most privately-held construction companies elect to be taxed as a flow-through entity for federal income tax purposes. Therefore, income, expense, and credits will not be taxed to the company directly, but instead, will pass through and be taxed to the owners of the company. This includes companies organized as S-Corporations, partnerships, limited liability companies, and proprietorships. Many states also permit this flow-through treatment. Therefore, when we describe a DTL on the balance sheet, the liability may, instead, be at the owner level, not the company level. However, most construction companies will make tax distributions to the owners to fund their current income tax liability. Accordingly, income tax deferral strategies at the company level have a direct bearing on the size of the company’s tax distribution and its cash flow.

So, what tools are available to a construction contractor to defer income tax? You look for tools that create taxable temporary differences. Taxable temporary differences produce deferred tax liabilities for financial reporting, and that means you pay later, not now. Without getting too deep into the weeds, here are some of those tools available to contractors under the Internal Revenue Code (“IRC”):

  1. Method of accounting. Contractors can select more than one method of accounting under the IRC. Selecting the correct methods will make a significant difference in tax deferral. The contractor may have an overall method of accounting, such as the accrual method, and different methods specific to non-exempt and exempt contracts. (Non-exempt contracts are those required under IRC Section 460 to account for revenue recognition using tax cost-to-cost percentage of completion (“POC”) method – generally not to the taxpayer’s advantage. Exempt contracts are those exempted from tax POC under IRC Section 460, permitting the taxpayer to select more favorable income recognition methods). Methods of accounting include:

    • Cash method. This can be an overall method of accounting but is limited to certain eligible entities based on average annual gross receipts.
    • Accrual method. This can be an overall method of accounting, including any exempt construction contracts. This is generally the worst method for contractors because taxation of overbilling is accelerated.
    • Completed contract method. For qualifying contractors, this is often the best method to elect because it produces the greatest deferral of income.
    • Exempt-contract POC method. This method can be elected for contracts that are exempt from POC under IRC section 460 and permits the percentage of completion methods other than the Section 460 cost-to-cost method.

  2. Contracts potentially exempt from tax POC under IRC Section 460. Additional tax deferral opportunities exist for contractors with exempt contracts under IRC Section 460.

    • Ten percent method. This election excludes from tax any contract that is less than 10% complete at year end. In other words, revenue and cost from contracts less than 10% complete are deferred from taxation until the tax year its percentage of completion is greater than 10%.
    • Small contractors. Contracts of small contractors, as defined in the code, may be exempted from tax POC under IRC Section 460. Other methods may be elected. Under the Tax Cuts and Job Act, contracts entered into after December 31, 2017, meet the exception for small construction contracts if the contract is expected to be completed within two years and the taxpayer meets the $25 million gross receipts test for the year the contract is entered into.
    • Home construction contracts. If certain requirements are met, the primary one being that at least 80% of the estimated total contract cost is expected to pertain to the construction of four or fewer dwelling units in the building, then that contract may be exempt from POC treatment under IRC Section 460. Another method may be elected.
    • Percentage of completion / capitalized cost method. This method exempts 30% of the contract from tax POC treatment and applies to residential construction contracts with more than 4 dwelling units with an average stay of more than 30 days. The 30% exempted portion is accounted for under the company’s normal method as elected.

The tax code does provide benefits to the construction industry, mostly through tax deferrals. The deferred income tax liability is the result of those tax deferrals and is a sign of savvy tax planning. Consider discussing your DTL with your tax professional to see what elections have been made and how those elections benefit the company and its owners.

Is Your Company Strong enough for Bonding?

Posted on by dsp64

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?

Posted on by dsp64

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?

Posted on by dsp64

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

Posted on by dsp64

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

Posted on by dsp64

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.

Posted on by dsp64

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

Posted on by dsp64

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

Posted on by dsp64

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.

Show Buttons
Hide Buttons