With tax season in full swing, Construction Business Owner caught up with David Jean, CPA, CCIFP, and principal of Albin, Randall & Bennett, to ask what construction business owners like you need to pay attention to when filing your taxes.
CBO: How will the Protecting Americans from Tax Hikes (PATH) Act affect business owners in the industry?
DJ: The greatest single thing PATH provided for the business owner is certainty in tax planning for their businesses. Instead of only a 1-year extension, a number of provisions were made permanent. Others were extended for a 5-year period.
Code Section 179 expensing of up to $500,000 annually for purchases of equipment and qualifying real property was made permanent. That amount is indexed for inflation and will increase over the years.
The Research and Development Tax Credit was also made permanent. Additionally, the credit is now available against both regular tax and alternative minimum tax, for eligible small businesses. The certainty of having this credit available year after year should provide good stimulus. These will allow these businesses to grow and expand.
Also extended permanently was the provision to depreciate qualified leasehold improvements, restaurant property and retail improvements over a shorter 15-year period. For businesses utilizing this type of property, their cost recovery is much shorter than the usual 39-year depreciation period.
Extended for an additional 5-year period is bonus depreciation. In addition to regular tax depreciation amounts, businesses may deduct an additional 50 percent of the cost of the new asset from 2015-2017, 40 percent in 2018 and 30 percent in 2019.
CBO: What new updates/regulations do business owners need to focus on this tax season?
DJ: Under the Affordable Care Act, businesses need to know about employer shared responsibility and information reporting applicable to the number of employees that they have. Planning the right way can avoid penalties, save money and improve recruiting and retaining of talent.
With the “Protecting Americans from Tax Hikes” act passed in late 2015, many of tax provisions that were renewed in the last 2 weeks of the year, for several years, became permanent. Businesses can actually plan ahead for such things as vehicle, equipment and machinery purchases knowing what the tax effect of those purchases will be. There are also various credits and deductions that are, for the first time in several years, known before the year begins and not near the end. Plan accordingly.
CBO: Do you have any specific advice/what to watch for commercial construction business owners this season?
DJ: We are already seeing an increase in work, which is promising for the construction industry. Construction businesses will need to choose their projects wisely and either expand or continue at their current size and increase pricing.
Many contractors who have moved toward the “cherry-picking” approach to business relationships have found that they are improving their profits, morale, relationships with clients and their expertise in specific niches. We are also seeing the beginnings of acquisition of other contractors as a way to increase size, expertise and client base. Many contractors have weaned themselves off of bid jobs completely, focusing on value rather than price with negotiated and pure design/build jobs. Our advice on expansion is to choose wisely, rather than aggressively expand. The likely result will be the same or greater profit.
The construction industry is also faced with a labor shortage. This season, they are thinking about how to better hire, retain and motivate businesses. The problem is bigger than one company. We encourage business owners to get involved and contribute to a larger solution to the shortage by working with construction industry trade groups in your state to get the word out, or by working with state officials. This involvement can give your business the inside edge on how to attract talent in your state. At the company level, morale is very important. If your employees feel that their hard work is contributing to something bigger and important, and who have opportunities to move up within your company if they focus on the right traits, your company will be more successful with employees in any job market.
CBO: What issues do you commonly see (year over year) during tax season in the construction industry?
DJ: Tax season tends to reveal a lack of strategic and business planning and lack of succession planning within construction companies. There seems to also be a lack of accounting/reporting discipline and companies not leveraging current accounting technology. It is only occasional that we see successful companies that don’t have significant accounting acumen or reporting capabilities. Timely financial information, both for your company as a whole and at the project level, is critical in identifying opportunities to increase profitability.
CBO: How can they be alleviated in 2016 (with the time available)?
DJ: For both strategic and succession planning, as well as the lack of accounting/reporting discipline, we recommend engaging a consultant to help drive these processes. Smaller contractors, and even some larger ones, tend to be the founders of their businesses. The reality is that this Baby-Boomer generation of business owners isn’t getting younger.
We are seeing many situations where the founders are not only still the owners, but also the only real decision makers. While it’s easy to put off taking the first step, the sooner this challenge of success planning is addressed the better. An exit planning consultant can be critical in helping owners draw up and implement a game plan, and as someone who is impartial to the outcome, can help keep emotions from dominating the decision-making process.
The same is true for improving your company’s accounting/reporting discipline. Hiring an outside consultant to help you evaluate your needs and drive the process of implementing solutions is typically the key to success.
For more questions, contact David Jean at djean@arbcpa.com or 207-772-1981. David V. Jean specializes in financial accounting and consulting for construction and real estate development companies. He is also a certified construction industry financial professional (CCIFP).
