Are Your Accounting Fees on the Rise?


by David Hegstrom

Unless you have been living under a rock for the last year, you have noticed costs in the Treasure Valley are rising rapidly. Everything from gas, materials, and equipment prices in the construction industry, to your bill at the grocery store are being affected. And now, for a variety of reasons, the prices for your accounting fees and services are following suit. But what are the major factors contributing to this escalation and what can you do to help reduce costs?

RISING COST FACTORS

Inflation: You have probably already seen the impact of inflation affecting multiple aspects of your business. According to the U.S. Bureau of Labor Statistics, the annual inflation rate for the United States for the 12 months ending December 2021 was seven percent. This is the largest inflation rate for a single
calendar year in nearly 40 years.

The Great Resignation: Employees are leaving their jobs at an unprecedented rate across all industries, or leaving their local jobs to work remotely for companies in states with higher wages. The effect of this trend is compounded by the fact that the accounting profession has one of the most aged workforces in the nation. The American Institute of CPAs (AICPA) estimates that over 75 percent of current CPAs will retire in the next 10 to 15 years.

Changes to the Tax Code: Every year there are amendments to the tax code. Typically these are small changes and the additional time required to prepare a tax return would be modest at best. Then in late 2017, the Trump administration passed the Tax Cuts and Jobs Act (TCJA), which was effective for the calendar year 2018. It was a massive overhaul to the US Tax Code. Enter the 2019 tax season; by most estimates, the TCJA increased tax preparation time by 30 percent. And since that time CPA firms have
been in hyperdrive due to the CARES Act, Employee Retention Tax Credit, PPP Loans, and all the amended tax returns that come with an ever-changing regulatory landscape. IRS Backlog: If you have received a letter from the IRS, you are not alone. The IRS has been understaffed and underfunded for decades. Right now the IRS is sitting on literal trailer-loads of notification responses and other correspondence. On February 10, 2022, the IRS determined that they would stop sending automated notifications for most tax related issues until their current backlog has been “sufficiently” resolved. It is important to note, however, the IRS has not suspended assessing fees and penalties; they are simply not communicating the fees and penalties they are assessing and effectively creating more backlog for later.

Other Regulatory Updates: The GAAP framework, the standardized rules required when presenting financial information for audits, review, and compilations, has adopted some major updates over the last
few years with more changes on the way (i.e. financial reporting leasing standards which must be adopted for 2022). And as we already talked about, more changes equals more time required for your CPA. To sum it all up, costs are on the rise because of higher operating costs, more work, increasing complexity in tax codes, and less staff to do it all. 

SO WHAT CAN BE DONE?

Now that we have identified why fees are on the rise, lets discuss what can be done to reduce costs.

Interim Work: If you are required to obtain an audit, review, or compilation ask your CPA if there is work that can be done outside of the typical CPA “busy season”. This may allow you to complete a portion of the engagement at a time of the year when there is additional staff availability and flexibility. This is even
more important if you are required to adopt a new ASU (Accounting Standards Update). Make a plan, identify a timeline, and then execute.

Regular Communication: The old process of only speaking to your CPA once a year during tax season doesn’t work anymore. Aside from the increasing regulatory hurdles for businesses, you may also be missing out on time-sensitive tax planning opportunities. So instead of waiting until the end of the year to bring in that old file full of receipts, begin consulting with your CPA in real time as financial situations change and events occur that financially impact your organization.

Systems Upgrade: When was the last time you took a hard look at your accounting procedures to find
efficiencies? There are many new tools that can increase a company’s accounting capability while also reducing the time and administrative burden of maintaining accurate financial records. Having your CPA clean up your books at the end of the year only increases your costs. Have an open conversation with them about what you can improve year-round to reduce the year-end burden. Keep in mind your CPA most likely also works with many other construction companies and is a great resource when looking for
new software to improve efficiencies, or for other accounting best practices. With all the changes we have seen the last few years, one thing can be sure it’s unlikely we will ever operate our businesses like we did pre-2019. And that’s okay. Your CPA isn’t the same professional that they were three years ago either, and have had to adapt to a vastly changing industry. It’s time to find a better way of managing our businesses,
of being more intentional, and of shaping the environment we all find ourselves in.

This article can be found on The Idaho AGC Building Idaho Magazine

Link to full magazine: https://www.idahoagc.org/sites/default/files/u-23/SP2022%20buildingIdaho.pdf


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June 12, 2024After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways: Buy the assets of the business, or Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership or LLC. In this article, we’re going to focus on buying assets. Asset purchase tax basics You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset. For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions. When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization). Asset purchase results with a pass-through entity Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold. Asset purchase results with a C corporation If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%. A tax-smart purchase price allocation With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired. To the extent allowed, you want to allocate more of the price to: Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables), Assets that can be depreciated relatively quickly (such as furniture and equipment), and Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years. You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated. You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another. Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable. Plan ahead Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase. © 2024   [...] Read more...
May 28, 2024If your business doesn’t already have a retirement plan, it might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions. For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $69,000 for 2024 (up from $66,000 for 2023). If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $69,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2024 by a whopping $22,080 (32% × $69,000). Other Possibilities: There are more small business retirement plan options, including: 401(k) plans, which can even be set up for just one person (also called solo 401(k)s), Defined benefit pension plans, and SIMPLE-IRAs. Depending on your situation, these plans may allow bigger or smaller deductible contributions than a SEP-IRA. For example, for 2024, a participant can contribute $23,000 to a 401(k) plan, plus a $7,500 “catch-up” contribution for those age 50 or older. Watch the Calendar Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year. Important: This provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made. For example, the deadline for the 2023 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 15, 2024, if you extend your 2023 tax return. The deadline for making a contribution for the 2023 tax year is also October 15, 2024. For the 2024 tax year, the deadline for setting up a SEP and making a contribution is October 15, 2025, if you extend your 2024 tax return. However, to make a SIMPLE-IRA contribution for the 2023 tax year, you must have set up the plan by October 1, 2023. So, it’s too late to set up a plan for last year. While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan options. Be aware that, if your business has employees, you may have to make contributions for them, too. © 2024       [...] Read more...
May 2, 2024Businesses usually want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why would you want to? One reason might be tax law changes that raise tax rates. The Biden administration has proposed raising the corporate federal income tax rate from its current flat 21% to 28%. Another reason may be because you expect your noncorporate pass-through entity business to pay taxes at higher rates in the future and the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates. If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher and the deductions will be more beneficial. To Fast-Track Income Consider these options if you want to accelerate revenue recognition into the current tax year: Sell appreciated assets that have capital gains in the current year, rather than waiting until a later year. Review the company’s list of depreciable assets to determine if any fully depreciated assets are in need of replacement. If fully depreciated assets are sold, taxable gains will be triggered in the year of sale. For installment sales of appreciated assets, elect out of installment sale treatment to recognize gain in the year of sale. Instead of using a tax-deferred like-kind Section 1031 exchange, sell real property in a taxable transaction. Consider converting your S corporation into a partnership or LLC treated as a partnership for tax purposes. That will trigger gains from the company’s appreciated assets because the conversion is treated as a taxable liquidation of the S corp. The partnership will have an increased tax basis in the assets. For construction companies with long-term construction contracts previously exempt from the percentage-of-completion method of accounting for long-term contracts: Consider using the percentage-of-completion method to recognize income sooner as compared to the completed contract method, which defers recognition of income until the long-term construction is completed. Limitations To Postpone Deductions Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value: Delay purchasing capital equipment and fixed assets, which would give rise to depreciation deductions. Forego claiming big first-year Section 179 deductions or bonus depreciation deductions on new depreciable assets and instead depreciate the assets over a number of years. Determine whether professional fees and employee salaries associated with a long-term project could be capitalized, which would spread out the costs over time. Buy bonds at a discount this year to increase interest income in future years. If allowed, put off inventory shrinkage or other write-downs until a year with a higher tax rate. Delay charitable contributions into a year with a higher tax rate. If allowed, delay accounts receivable charge-offs to a year with a higher tax rate. Delay payment of liabilities where the related deduction is based on when the amount is paid. Contact us to discuss the best tax planning actions in the light of your business’s unique tax situation. © 2024       [...] Read more...
May 2, 2024  If you operate a business, or you’re starting a new one, you know records of income and expenses need to be kept. Specifically, you should carefully record expenses to claim all the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS. Be aware that there’s no one way to keep business records. On its website, the IRS states: “You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.” But there are strict rules when it comes to deducting legitimate expenses for tax purposes. And certain types of expenses, such as automobile, travel, meal and home office costs, require extra attention because they’re subject to special recordkeeping requirements or limitations on deductibility. Ordinary and Necessary A business expense can be deducted if a taxpayer establishes that the primary objective of the activity is making a profit. To be deductible, a business expense must be “ordinary and necessary.” In one recent case, a married couple claimed business deductions that the IRS and the U.S. Tax Court mostly disallowed. The reasons: The expenses were found to be personal in nature and the taxpayers didn’t have adequate records for them. In the case, the husband was a salaried executive. With his wife, he started a separate business as an S corporation. His sideline business identified new markets for chemical producers and connected them with potential customers. The couple’s two sons began working for the business when they were in high school. The couple then formed a separate C corporation that engaged in marketing. For some of the years in question, the taxpayers reported the income and expenses of the businesses on their joint tax returns. The businesses conducted meetings at properties the family owned (and resided in) and paid the couple rent for the meetings. The IRS selected the couple’s returns for audit. Among the deductions the IRS and the Tax Court disallowed: Travel expenses. The couple submitted reconstructed travel logs to the court, rather than records kept contemporaneously. The court noted that the couple didn’t provide “any documentary evidence or other direct or circumstantial evidence of the time, location, and business purpose of each reported travel expense.” Marketing fees paid by the S corporation to the C corporation. The court found that no marketing or promotion was done. Instead, the funds were used to pay several personal family expenses. Rent paid to the couple for the business use of their homes. The court stated the amounts “were unreasonable and something other than rent.” Retirement Plan Deductions Allowed The couple did prevail on deductions for contributions to 401(k) accounts for their sons. The IRS contended that the sons weren’t employees during one year in which contributions were made for them. However, the court found that 401(k) plan documents did mention the sons working in the business and the father “credibly recounted assigning them research tasks and overseeing their work while they were in school.” Thus, the court ruled the taxpayers were entitled to the retirement plan deductions. (TC Memo 2023-140) Lesson Learned As this case illustrates, a business can’t deduct personal expenses, and scrupulous records are critical. Make sure to use your business bank account for business purposes only. In addition, maintain meticulous records to help prepare your tax returns and prove deductible business expenses in the event of an IRS audit. Contact us if you have questions about retaining adequate business records. © 2024       [...] Read more...
May 2, 2024It’s not unusual for a partner to incur expenses related to the partnership’s business. This is especially likely to occur in service partnerships such as an architecture or law firm. For example, partners in service partnerships may incur entertainment expenses in developing new client relationships. They may also incur expenses for: transportation to get to and from client meetings, professional publications, continuing education and home office. What’s the tax treatment of such expenses? Here are the answers. Reimbursement or Not As long as the expenses are the type a partner is expected to pay without reimbursement under the partnership agreement or firm policy (written or unwritten), the partner can deduct the expenses on Schedule E of Form 1040. Conversely, a partner can’t deduct expenses if the partnership would have honored a request for reimbursement. A partner’s unreimbursed partnership business expenses should also generally be included as deductions in arriving at the partner’s net income from self-employment on Schedule SE. For example, let’s say you’re a partner in a local architecture firm. Under the firm’s partnership agreement, partners are expected to bear the costs of soliciting potential new business except in unusual cases where attracting a large potential new client is deemed to be a firm-wide goal. In attempting to attract new clients this year, you spend $4,500 of your own money on meal expenses. You receive no reimbursement from the firm. On your Schedule E, you should report a deductible item of $2,250 (50% of $4,500). You should also include the $2,250 as a deduction in calculating your net self-employment income on Schedule SE. So far, so good, but here’s the issue: a partner can’t deduct expenses if they could have been reimbursed by the firm. In other words, no deduction is allowed for “voluntary” out-of-pocket expenses. The best way to eliminate any doubt about the proper tax treatment of unreimbursed partnership expenses is to install a written firm policy that clearly states what will and won’t be reimbursed. That way, the partners can deduct their unreimbursed firm-related business expenses without any problems from the IRS. Office in a Partner’s Home Subject to the normal deduction limits under the home office rules, a partner can deduct expenses allocable to the regular and exclusive use of a home office for partnership business. The partner’s deductible home office expenses should be reported on Schedule E in the same fashion as other unreimbursed partnership expenses. If a partner has a deductible home office, the Schedule E home office deduction can deliver multiple tax-saving benefits because it’s effectively deducted for both federal income tax and self-employment tax purposes. In addition, if the partner’s deductible home office qualifies as a principal place of business, commuting mileage from the home office to partnership business temporary work locations (such as client sites) and partnership permanent work locations (such as the partnership’s official office) count as business mileage. The principal place of business test can be passed in two ways. First, the partner can conduct most of partnership income-earning activities in the home office. Second, the partner can pass the principal place of business test if he or she: Uses the home office to conduct partnership administrative and management tasks and Doesn’t make substantial use of any other fixed location (such as the partnership’s official office) for such administrative and management tasks. To Sum Up When a partner can be reimbursed for business expenses under a partnership agreement or standard operating procedures, the partner should turn them in. Otherwise, the partner can’t deduct the expenses. On the partnership side of the deal, the business should set forth a written firm policy that clearly states what will and won’t be reimbursed, including home office expenses if applicable. This applies equally to members of LLCs that are treated as partnerships for federal tax purposes because those members count as partners under tax law. © 2024     [...] Read more...
May 2, 2024Construction projects are inherently fraught with risk. That’s why having the right insurance in place is critical for all parties involved. For contractors, however, adequate coverage typically comes at a high price and with abundant red tape when dealing with insurers. One potential solution is a contractor-controlled insurance program (CCIP). What is it? CCIPs are a type of “wrap-up” policy that’s managed by the general contractor and covers most parties to a construction project. However, design professionals, such as architects and engineers, usually aren’t covered. Typically, CCIPs include general liability, workers’ compensation and excess liability coverage. There may also be an option to add other coverage, such as builder’s risk, professional liability or pollution liability. Insurance for commercial vehicles and equipment generally isn’t included. What are the Advantages? Ordinarily, the general contractor and each subcontractor on a project buy their own policies. Then, each subcontractor names the general contractor and owner as “additional insureds,” and each subcontract contains complex indemnity provisions. Multiple insurers and policies may lead to coverage gaps. In turn, claims can lead to costly disputes and delays as the parties sort out their respective responsibilities. By wrapping up coverage under a single policy, a CCIP can help parties avoid coverage gaps and minimize disputes and litigation over who’s at fault or responsible for damages if incidents occur. And the general contractor may be able to negotiate broader coverage, higher limits and lower premiums than the subcontractors could on their own. Plus, by eliminating the need for subcontractors to secure their own insurance coverage, a CCIP can expand the pool of potential bidders. This can be an important advantage given today’s shortage of skilled labor. When work gets underway, the general contractor wields great control over all aspects of risk management on a project, including insurance of course. Because CCIPs are highly loss-sensitive, most general contractors are strongly motivated to minimize claims through a comprehensive, centralized and well-enforced safety program. If a claim does arise, having only one administrator tends to accelerate the claims process and reduce the cost thereof. And the Disadvantages? As you might expect, there are risks and costs for the general contractor setting up the CCIP. Although the program can eventually streamline insurance administration, the initial burden of finding and negotiating coverage can be daunting. In fact, given the complexity of CCIPs, many contractors find them suitable only for larger projects. Managing subcontractor enrollment can also be an arduous task, and the subcontractors who sign up may present risks all their own. Because subcontractors aren’t operating under their own insurance policies, there’s less incentive for them to limit their losses. Also, because CCIPs are essentially “no-fault” policies — that is, coverage is provided regardless of who’s at fault — subcontractors may be more likely to submit false claims. There’s also financial risk. In the unlikely event that claims exceed a CCIP’s coverage limits, the general contractor might be financially responsible for the difference. Who can Help? If you’re looking to enhance project risk management, reduce insurance costs and streamline claims, consider a CCIP. Just bear in mind that we’ve given examples of only a few of the potential disadvantages; there may be others. Contact our firm for help weighing all the pros and cons. © 2024   Construction & Engineering Page   Real Estate Page   [...] Read more...
May 2, 2024  Accurate, timely financial information is key to making good decisions for executives, board members, investors and other stakeholders. But not everyone who reads your financial statements will really understand the numbers they receive and what they mean to your organization. Here are some ways to present your financial results in a reader friendly manner. Consider your Audience The people who rely on your organization’s financial statements probably come from different walks of life and different positions. Some may have financial backgrounds, but others might not. And it’s this latter group you need to keep in mind as you supply financial data. This is especially true for nonprofits, such as charities, religious organizations, recreational clubs and social advocacy groups. Their stakeholders may include board members, volunteers, donors, grant makers, watchdog groups and other people in the community. But it also may apply to for-profit businesses that share financial data with their boards, employees and investors who don’t have a controlling interest in the organization. Don’t assume all your stakeholders understand accounting jargon. It may be helpful to provide definitions of certain financial reporting terms. For example, a nonprofit might explain that “board-designated net assets” refers to items set aside for a particular purpose or period by the board. Examples include safety reserves or a capital replacement fund, which have no external restriction by donors or by law. While this definition might seem obvious to a nonprofit’s management team, stakeholders might not be familiar with it. You could also provide internal stakeholders with some basic financial training by bringing in outside speakers, such as accountants, investment advisors and bankers. Add Pictures to Get Your Message Across In addition to providing numerical information from your company’s income statement, balance sheet and statement of cash flows, consider presenting some information in a graphical format. Long lists of numbers can have a dizzying effect on financial statement readers. Pictures may be easier for laypeople to digest than numbers and text alone. For instance, you might use a pie graph to show the composition of your company’s assets. Likewise, a line or bar graph might be an effective way to communicate revenue, expenses and profit trends over time. Present Financial Ratios Financial ratios show relationships between key items on your financial statements. While ratios don’t appear on the face of your financial statements, you can highlight them when communicating results to stakeholders. For instance, you might report the days in receivables ratios (accounts receivable divided by annual revenue times 365 days) from the current and prior reporting periods to demonstrate your efforts to improve collections. Or you might calculate gross margin (revenue minus cost of goods sold) as a percentage of revenue from the current and prior reporting periods to show how increases in raw materials and labor costs have affected your business’s profitability. Another useful tool is the “current ratio.” A comparison of current assets to current liabilities is commonly used as a measure of short-term liquidity. A ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted current assets to cash. It may also be helpful to provide industry benchmarks to show how your company’s performance compares to others in your industry. This information is often available from industry trade publications and websites. Be Transparent About Non-GAAP Metrics One area of particular concern is how your organization presents financial information that doesn’t conform to U.S. Generally Accepted Accounting Principles (GAAP), such as earnings before interest, taxes, depreciation and amortization (EBITDA). The use of non-GAAP metrics has grown in recent years. While non-GAAP metrics can provide greater insight into the information that management considers important in operating the business, take care not to mislead stakeholders by putting greater emphasis on non-GAAP metrics than the GAAP data provided in your financial statements. For instance, EBITDA is often adjusted for such items as stock-based compensation, nonrecurring items, intangibles and other company-specific items. If you report EBITDA, you should clearly disclose how it was calculated, including any adjustments, and how it compares to earnings before tax on your GAAP income statement. Use Plain English Regardless of your industry, stakeholders want accurate, transparent information about your organization’s financial performance. It’s up to you to supply them with information they fully understand so they can make informed decisions. Contact us for help communicating your results more effectively to give stakeholders greater confidence and clarity when reviewing your financial reports. © 2024       [...] Read more...
April 10, 2024For construction businesses, financial management is notoriously complex. Contractors have to deal with the ebbs and flows of their respective markets, project-based pricing and collections, rising operating costs, and various other factors — not the least of which is bad weather! Yet effective financial management is essential for your company to thrive. Here are some ways to better manage your money. Follow Strong Billing Procedures Healthy cash flow — one of the most important aspects of financial management — depends on your business’s ability to both meet contractual obligations and receive timely payments. To this end, establishing a standard billing schedule for every job will make managing accounts less complicated and help you keep track of monthly revenue. When drafting contracts, clearly include payment amounts and when they’re due — as well as penalties for late payments. Equally important, clearly outline a process for change order approvals and invoicing that allows you to bill for additional work as soon as possible. Diligently follow the billing schedule as projects or project phases are completed. To help ensure prompt payment, make sure invoices are well-designed, detailed and include any necessary proof-of-work documentation. If you don’t already, offer electronic payment options to make paying quicker and easier. Last, be sure to set up automated reminders to regularly follow up on unpaid invoices. Excel at Materials Management Effective financial management also depends largely on how cost-efficiently you procure, store and use construction materials. Implement strategies to optimize all three of these actions while minimizing waste. Begin by taking a hard look at how you capture, organize and share materials-related data across your projects. Do you have a centralized system for doing so? Are you tracking losses and proactively addressing how to prevent theft, mistakes and mismanagement? With the right system in place and technology supporting it, you can minimize excessive and unnecessary spending on materials. From there, be sure you’re addressing the timely delivery of materials. Supply chain slowdowns or disruptions aren’t in the news as much anymore, but they’re still a challenge for many contractors. Some construction companies maintain inventories of critical and long-lead items to ensure they’ll have the necessary materials as jobs come up. But doing so entails paying for storage facilities and investing time and resources into inventory management. Another strategy is to diversify your supplier base and include alternative local suppliers who can deliver materials of similar type and quality. Keep a Close Eye on Labor Nearly all businesses need to confront the tricky issue of “rightsizing” their workforces and paying employees competitively. Construction companies have the added challenge of doing all this in the midst of a seemingly never-ending skilled labor shortage. One thing that can help is quantifying your labor needs as precisely as possible. Determine how many workers are needed to complete each typical job task or how many are needed to work on each phase of the types of projects you usually perform. Obviously, you’ll need historical data to make such determinations, so be sure you’re capturing this information. Compensation, benefits and taxes are also major factors. Indeed, knowing your true labor costs — often referred to as labor burden rate — is a mission-critical financial-management activity for construction businesses. Embrace Technology Using up-to-date and secure financial management software and mobile devices tailored to the construction industry can help streamline financial activities related to estimating, job costing, payroll and invoicing. The right combination of tech assets can help: Automate calculations and processes, Create more accurate estimates, Track a variety of costs and accurately allocate them to projects, and Generate the necessary documentation for your records, as well as for financial reporting. As always, however, selecting the right tech tools for your construction business’s distinctive needs and comfort level is the hard part. Choose your purchases and upgrades carefully — always with the goal of improving the clarity of your finances and your control of them. Lay the Foundation Managing cash flow, materials, labor and technology costs for your hardworking construction company may seem as difficult as laying a solid foundation on unstable soil. But with the right personnel, policies, procedures and computing tools in place, it can be done. We’d be happy to help you review your construction company’s approach to financial management and target areas for improvement.© 2024   Construction & Engineering Page   Real Estate Page   [...] Read more...
April 10, 2024The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, it’s scheduled to disappear. So if you’re eligible, you want to make the most of the deduction while it’s still on the books because it can potentially be a big tax saver. Deduction Basics The QBI deduction is written off at the owner level. It can be up to 20% of: QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, plus QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation. How is QBI defined? It’s qualified income and gains from an eligible business, reduced by related deductions. QBI is reduced by: 1) deductible contributions to a self-employed retirement plan, 2) the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums. Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals. Limitations At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively. If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property. The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business. Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends). Unfavorable Rules for Certain Businesses For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB. Other Factors Other rules apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately. There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result. Use it Or Potentially Lose it © 2024       [...] Read more...
April 10, 2024Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results. Sec. 179 Deduction Basics Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction. Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems. The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.) Bonus Depreciation Basics Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer. For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023. Sec. 179 vs. Bonus Depreciation The current Sec. 179 deduction rules are generous, but there are several limitations: The phase-out rule mentioned above, A business taxable income limitation that disallows deductions that would result in an overall business taxable loss, A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations. First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively. So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can. Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 . That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year. Managing Tax Breaks As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have. © 2024       [...] Read more...
April 10, 2024If your small business is strapped for cash (or likes to save money), you may find it beneficial to barter or trade for goods and services. Bartering isn’t new — it’s the oldest form of trade — but the internet has made it easier to engage in with other businesses. However, if your business begins bartering, be aware that the fair market value of goods that you receive in these types of transactions is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties. Fair Market Value Here are some examples of an exchange of services: A computer consultant agrees to offer tech support to an advertising agency in exchange for free advertising. An electrical contractor does repair work for a dentist in exchange for dental services. In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence. In addition, if services are exchanged for property, income is realized. For example: If a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock. Joining a Club Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members. In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income. If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate. Tax Reporting By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS. Exchanging Without Exchanging Money By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact us if you need assistance or would like more information. © 2024       [...] Read more...
April 10, 2024Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. April 15th If you’re a calendar-year corporation, file a 2023 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due. For corporations, pay the first installment of 2024 estimated income taxes. Complete and retain Form 1120-W (worksheet) for your records. For individuals, file a 2023 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due. For individuals, pay the first installment of 2024 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES). April 30th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941) and pay any tax due. May 10th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941), if they deposited on time, and fully paid, all of the associated taxes due. May 15th Employers deposit Social Security, Medicare and withheld income taxes for April if the monthly deposit rule applies. June 17th Corporations pay the second installment of 2024 estimated income taxes. © 2024       [...] Read more...
April 8, 2024At Financial Executives International’s Corporate Financial Reporting Insights Conference last November, staff from the Securities and Exchange Commission (SEC) expressed concerns related to the use of financial metrics that don’t conform to U.S. Generally Accepted Accounting Principles (GAAP). Companies continue to have trouble complying with the SEC’s guidelines on non-GAAP reporting, said Lindsay McCord, chief accountant of the SEC’s Division of Corporation Finance. Here’s some guidance that may help as you prepare your company’s financial statements for the first quarter of 2024. Ongoing Concerns GAAP is a set of rules and procedures that accountants typically follow to record and summarize business transactions. These guidelines provide the foundation for consistent, fair, honest and accurate financial reporting. Private companies generally aren’t required to follow GAAP, but many do. Public companies don’t have a choice; they’re required by the SEC to follow GAAP. Over the years, the use of non-GAAP measures has grown. These unaudited figures can provide added insight when they’re used to supplement GAAP performance measures. But they can also be used to mislead investors and artificially inflate a public company’s stock price. Specifically, companies may include unaudited performance figures — such as earnings before interest, taxes, depreciation and amortization (EBITDA) — to cast the company in a more favorable light. Non-GAAP metrics may appear in the management, discussion and analysis section of their financial statements, earnings releases and investor presentations. For example, a company’s EBITDA is typically higher than its GAAP earnings. That’s because EBITDA is commonly adjusted for such items as stock-based compensation, nonrecurring items, intangibles and other company-specific items. In addition, non-GAAP metrics or adjustments may be cherry-picked to present a stronger financial picture than what appears in audited financial statements. Some companies also may erroneously present non-GAAP metrics more prominently than GAAP numbers — or fail to clearly label and describe non-GAAP measures. 10 Key Questions The Center for Audit Quality (CAQ) recommends considering the following 10 questions to help ensure transparent non-GAAP metric disclosures: What’s the purpose of the non-GAAP measure, and would a reasonable investor be misled by the information? Has the non-GAAP measure been given more prominence than the most comparable GAAP measure? How many non-GAAP measures have been presented, and are they all necessary and appropriate for investors to understand performance? Why has management selected a particular non-GAAP measure to supplement GAAP measures that are already established and consistently applied within its industry or across industries Does the company’s disclosure provide substantive detail on its purpose and usefulness for investors? How is the non-GAAP measure calculated, and does the disclosure clearly and adequately describe the calculation, as well as the reconciling items between the GAAP and non-GAAP measures? How does management use the measure and has that use been disclosed? Is the non-GAAP measure sufficiently defined and clearly labeled as non-GAAP or could it be confused with a GAAP measure? What are the tax implications of the non-GAAP measure, and does the calculation align with the tax consequences and the nature of the measure? Does the company have material agreements, such as a debt covenant, that require compliance with a non-GAAP measure? If so, are they disclosed? The CAQ provides additional questions that address the consistency and comparability of non-GAAP metrics. We Can Help Non-GAAP metrics can provide greater insight into the information that management considers important in running the business. However, care should be taken not to mislead investors and lenders. Contact us to discuss your company’s non-GAAP metrics and disclosures. © 2024       [...] Read more...
January 25, 2024  Beginning in 2024, small businesses will need to comply with the Corporate Transparency Act. Harris CPAs is excited to work with our clients that are impacted and we are close to selecting a third party provider to assist our clients with these filings. We will have that information available soon! In the meantime we wanted to provide a brief overview of the Act and its requirements. Corporate Transparency Act – What is it and what does it mean for me? In 2021, Congress enacted the Corporate Transparency Act. This now requires some businesses to file a Beneficial Ownership Information (BOI) report with FinCEN (Financial Crimes and Enforcement Network) of the United States Treasury. In preparing the filing, there are several steps to go through to be in compliance with the new reporting requirement. We hope to walk you through these important steps to make the process a bit more understandable. Here is an overview and checklist of the Corporate Transparency Act guidelines to follow: Determine if you are a “reporting company.” Define who the beneficial owners are – spoiler alert, it’s not just members of the LLC or shareholders. Identify up to two company applicants. Understand the timeline and file electronically on the Treasury Department’s website (which went live on January 1, 2024). How do I determine if I have a “reporting company”? A “reporting company” is a corporation, Limited Liability Company (LLC), or other entity created by filing a document. This must be filed with a Secretary of State, a similar office under the law of state or Indian tribe, or a foreign company registered to do business in the U.S. at any Secretary of State or Indian Tribe filing. There are twenty-three types of entities that are exempt from filing. Many of the exemptions are publicly traded companies, nonprofits (organized under 501(c) of the Internal Revenue Code) and certain large operating companies. Large operating companies are defined as having average gross receipts over the past three taxable years in excess of $5 million AND employing more than 20 full-time staff members. I have determined that I have a “reporting company”; who are my beneficial owners? Once you determine that you have a filing requirement, you must determine who has to be reported as a beneficial owner. A beneficial owner is defined as any individual who directly or indirectly exercises substantial control over a reporting OR owns at least 25% of the ownership interest in the company. Ownership interests include any items that may be converted to ownership in the future (i.e., stock options, restricted stock units or debt that may be converted to equity). There are 5 exceptions to the definition of a beneficial owner. This includes: (1) a minor child; (2) a nominee/intermediary/custodian/agent; (3) employees who are not senior officers, do not exercise substantial control over the business, or do not have an economic benefit of the business other than wages earned; (4) ownership through future inheritance; and (5) a creditor holding non-convertible debt instrument. Who are the company applicants? The company is able to report up to two applicants on the filing of the BOI. The company applicant would be the person(s) who filed the original organizational documents with the Secretary of State when the entity was created. If a third party was used, the individual within the company who authorized the third party to create the entity would be the applicant. Company applicants are only required to be disclosed if the entity was created on or after January 1, 2024. For entities created before this date, company applicants are not required to be disclosed. What information do I need to collect and report for the beneficial owners of my business? For a “reporting company”, you will need to report: (1) the full legal name of the business along with any trade names used; (2) the complete current U.S. address; (3) the state of registration; and (4) the taxpayer ID number used by the business for tax filings. For each beneficial owner, you will need their full legal name, date of birth, complete current address and a copy of one of the following non-expired documents: U.S. Passport, State Driver’s license or identification document issued by a state, local government or tribe. These documents will need to be uploaded to the Treasury Department portal. When is my report due? New entities filed with a Secretary of State after 12/31/2023 and before 12/31/2024 must file within 90 days of creation of the entity. Entities filed with a Secretary of State after 12/31/2024 will have to prepare the initial filing 30 days after the initial Secretary of State filing. However, existing companies created with a Secretary of State have to file their initial report by December 31, 2024. Once the initial report is filed, there is no additional filing needed until you experience a change in the BOI report. All companies who have a change in their BOI after initial filing are required to file an updated report within 30 days of the change. Examples of changes include changes to name, address, obtaining a new driver’s license or passport, changes to officer positions, and registering a DBA. If a beneficial owner becomes deceased, the report needs to be filed within 30 days of settling the owner’s estate. What happens if companies do not file? Penalties accrue at $591 per day, up to 2 years in prison, and/or up to $10,000 in fines. Hopefully the information provided below leaves you feeling a bit more informed on the steps needed to properly file with the new reporting requirement. Obviously working with your accountant can greatly help in navigating any questions or challenges that arise for your business, as it relates to the Corporate Transparency Act.   Harris will be providing more information to assist you in the filing requirement. Look for this communication to come soon.   [...] Read more...
December 16, 2023  As we approach the new year, it is time for businesses to review their 2023 and 2024 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2023 Year-End Tax Planning for Businesses. This year’s guide is compiled into chapters for easy reference: Tax Accounting Methods Business Incentives & Tax Credits Customs & International Trade Financial Transactions & Instruments Global Employer Services Income Tax – ASC 740 International Tax Partnerships Real Estate State & Local Tax Transfer Pricing [...] Read more...
December 16, 2023As we approach the new year, it is time for individuals to review their 2023 and 2024 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2023 Year-End Tax Planning for Individuals: Highlights from this guide: Individual Tax Planning Highlights with tax brackets Timing of Income and Deductions Long-Term Capital Gains with rate brackets Retirement Plan Contributions Foreign Earned Income Exclusion Kiddie Tax Alternative Minimum Tax Limitations on Deduction of State and Local Taxes ( Salt Limitations) Charitable Contributions Estate and Gift Taxes Net Operating Losses and Excess Business Loss Limitation [...] Read more...
August 22, 2023    The U.S. Department of Labor (DOL) has issued its long-awaited Final Rule to revise the Davis Bacon Act (DBA) regulations. The Final Rule will be effective 60 days after the date of publication in the Federal Register, which currently is scheduled for August 23rd. While we are still analyzing all the regulatory changes in the 812 pages Final Rule, it is clear (like the DOL’s Notice of Proposed Rulemaking (NPRM) issued March 18, 2022) that the Final Rule contains only a few changes that will be beneficial to contractors, while most of the changes heavily favor workers and unions and enhance the DOL’s enforcement tools. Examples of key changes in the latter category include: Changing the way wage and fringe rates are developed in wage determinations to favor adoption of union rates which will result in higher wage and benefits Broadening the definition of “site of the work” to include locations where “significant portions” of a project (such as prefabricated materials manufacturing facilities) are produced Expanding DBA coverage of truck drivers and material suppliers Making DBA contract clauses and applicable wage determinations effective by “operation of law” even where a contracting agency fails in include them in a contract or funding agreement Requiring DOL approval of vacation and holiday plans for fringe credit Requiring contractors to consent to cross withholding for back wages owed on contracts held by different but related legal entities (those controlled by the same controlling shareholder or entities that are joint venturers or partners on a federal contract) Expanding record-keeping obligations These changes in the DBA regulation will impact not only Davis Bacon Act contracts, but also the DBA requirements in over 70 statutes (DBA Related Acts). As a result, federal agencies provide funding assistance for construction projects primarily through direct funding, grants, loans, loan guarantees, or insurance. Also impacted, at least in part, will be the prevailing wages requirements of the Inflation Reduction Act, which provides enhanced tax credits for certain clean energy projects in exchange for compliance with prevailing wage and apprenticeship requirements. We anticipate multiple legal challenges to the Final Rule by construction trade associations and other interested parties, and that these court filings will be accompanied by requests for temporary injunctions of the Final Rule. Construction contractors and other impacted parties should start gearing up now for compliance with the Final Rule. Construction & Engineering Page Real Estate Page [...] Read more...
May 18, 2023by Drew Mansell, CPA Introduction The Inflation Reduction Act (IRA) increased the potential benefit of several energy efficiency tax incentives. These include the Section 179D energy efficient commercial buildings deduction and the Section 45L new energy efficient home credit. A more detailed description of these incentives is below. These changes warrant a renewed look at these incentives by companies looking to build or remodel real property. The Inflation Reduction Act’s stated goals include reducing carbon emissions and encouraging domestic energy production and manufacturing. The law introduces and expands existing tax incentives available for those investing in clean energy projects. It also increased the time horizon for these incentives, in many cases by up to 10 years. Importance of Extension Many tax credits and incentives available have limited time horizons, often requiring annual renewal by congress. This has caused uncertainty about their benefits, especially in industries where projects typically take multiple years to complete. With the extension of these incentives for the next ten years, that uncertainty is eliminated and developers can build these incentives into project costs for the foreseeable future. Tax Incentives to Watch New Energy Efficient Home Credit (IRC Sec. 45L) A $2,000 credit per single family residential housing unit. Available to multifamily developers, investors, and construction companies that build energy efficient properties sold or leased through Dec. 31, 2022. Increased to $2,500 per unit under Energy Star and $5,000 per unit under the Zero Energy Ready Homes program from Jan. 1, 2023, through Dec. 31, 2032. Energy Efficient Commercial Buildings Deduction (IRC Sec. 179D) Deduction available to building owners for installing qualifying energy systems. The deduction can be up to $1.88 per sq. ft. through Dec. 31, 2022 and increases up to $5.00 per sq. ft. beginning in 2023 if the project meets prevailing wage, and apprenticeship requirements. See below. The Feasibility Study Real estate and construction companies should discuss these incentives with their tax advisors who can connect them with experts to determine project feasibility. These professionals, usually engineers, evaluate a company’s projects and consider incentives that are likely applicable. The study can be used to make businesses decisions about next steps. A feasibility analysis can follow five simple steps: Consider the project’s goals. Look into intended investments your company plans to make for its building project. Split investments up into distinct groups. Section off relevant investments into qualifying and nonqualifying categories. Match investments to potential IRA incentives. Compare the list of planned investments with the list of available tax incentives and determine overlap. Conduct a cost-benefit analysis of implementing a tax incentive. Calculate the degree of investment required to achieve eligibility and the return on investment the tax incentives would offer. Identify requirements to substantiate claims to incentives. Pull together the documentation required to prove existing or intended adherence to tax incentive requirements. Prevailing Wage & Apprenticeship Requirements A key hurdle to qualify for these incentives are the prevailing wage and apprenticeship requirements. Companies must pay workers wages and benefits that meets standards for their geographical area set by the government. A certain portion of the labor on each project must also be performed by certified apprentices. It is important to understand these requirements before beginning a project. A feasibility study could include an analysis of these requirements and whether adjustments would be required to meet them. Conclusion These incentives have often been overlooked by taxpayers and practitioners alike due to their relatively minor potential benefits and complex rules to navigate. However, after the “remodel” of these incentives in the IRA, they deserve another look. We recommend reaching out to Harris or your preferred advisor if you think a project in your pipeline could qualify for one of these incentives.   Full Magazine Issue here: https://www.idahoagc.org/blog/spring-2023-buildingidaho   Construction & Engineering Page   Real Estate Page   [...] Read more...
December 9, 2022by Kevin Hatrick Small business owners are always looking for ways to protect against catastrophic risks while improving cash flows. One tool that can help you do both is using a captive insurance company. A captive insurance company is a small insurance company created by a business to help hedge against specific risks – generally risks that a company cannot protect against using available insurance, such as supply-chain interruption or key employee loss. It is an increasingly popular tool for risk management, currently being used by over 90% of Fortune 1000 companies. By creating and using a captive insurance company, a business essentially pays insurance premiums to a company they own. The insurance company then keeps that money available – usually in low risk investment vehicles – to be used to protect against the specified risks if and when they occur.There are three main advantages of captive insurance: Increased protection – Captive insurance companies allow businesses to be ready for business disruptions that would previously have gone uninsured. Also, because captive insurance inherently offers financial rewards for effectively controlling losses, safety and loss control get a higher level of attention. Improved profitability – There are a number of ways in which captive insurance companies help businesses increase profitability.a. They provide the opportunity to capture investment income from the reserves.b. They reduce the expense factors associated with commercial insurance.c. They minimize the impact of specific losses and risks. Tax savings – Captive insurance companies can elect to be taxed only on its investment income and not on the insurance premiums it receives. This allows for potential short-term and long-term tax savings opportunities. If you want to minimize risks while simultaneously improving cash flows, protect your business against disruptions, increase profitability, and increase your company’s tax savings; using a captive insurance company can be extremely beneficial. If you think this may be an option for your company, consult with your tax professional for more guidance.   Construction & Engineering Page   Real Estate Page   [...] Read more...
November 11, 2022As we approach the new year, it is time for individuals to review their 2022 and 2023 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2022 Year-End Tax Planning for Individuals: Highlights from this guide: Individual Tax Planning Highlights with tax brackets Timing of Income and Deductions Long-Term Capital Gains with rate brackets Retirement Plan Contributions Foreign Earned Income Exclusion Kiddie Tax Alternative Minimum Tax Limitations on Deduction of State and Local Taxes ( Salt Limitations) Charitable Contributions Net Operating Losses and Excess Busoness Loss Limitation Estate and Gift Taxes [...] Read more...
September 23, 2022by Drew Mansell, CPA – Harris The Tax Cuts and Jobs Act (TCJA), passed in 2017, was the most significant amendment to the Internal Revenue Code since the 1980s. The majority of the changes have already gone in to effect, and taxpayers and practitioners alike are familiar with most of them, as we’re four tax years in to the law’s implementation. However, a set of amendments seldom discussed until now are the amendments to Internal Revenue Code Section 174. These changes go in to effect for tax years beginning after 12/31/21 and may impact some construction and engineering firms with R&D. Section 174 defines which expenditures are qualifying research and development expenditures associated with claiming an R&D Tax Credit under Section 41 on form 6765. These costs include costs incurred related to the development or improvement of a product, including costs associated with improving the production process, and costs incurred for internally developed software. Starting in 2022, these costs can no longer be expensed in the year incurred. The amendments to Section 174 require these costs to be amortized over 5 years for costs incurred domestically, and 15 years for costs incurred outside the US. These costs must be capitalized as of the midpoint of the tax year when the expenses were incurred. This means the 60 or 180 month amortization period will begin July 1st for most taxpayers. A key point about the changes to Section 174 is that even if a taxpayer is not eligible to take the R&D tax credit under Section 41, the requirement to capitalize Section 174 costs still applies. A requirement to file an Accounting Method Change (Form 3115) may exist for taxpayers who have historically expensed Section 174 costs in the year incurred. Companies impacted by the above changes should contact Harris prior to the end of 2022 to ensure these costs are being accurately captured, as well as to discuss any potential 3115 filing requirement and materiality of book to tax differences.     Construction & Engineering Page   [...] Read more...
July 20, 2022by Alison Suko   Do you own an interest in an S Corporation, Partnership, or Limited Liability Company taxed as a Partnership? If it operates in Idaho, it may qualify as an Affected Business Entity (ABE). Many businesses taxed as S Corporations or Partnerships, currently pay distributions to their owners in order to pay the taxes on the business taxable income. Because distributions are not deductible from taxable income, the taxes are paid by the source, but there is no tax benefit. On April 15, 2021, Governor Little signed House Bill 317, now Idaho Code Section 63-3026B “Affected Business Entities – State and Local Taxation Treatment.” This new law allows certain pass through entities like those mentioned above to pay Idaho state income taxes on the owner’s share of the business income at a flat 6.5% rate. This tax is deductible on the pass through owner’s federal tax return. It is not deductible on the owner’s Idaho tax return, but instead is treated as a credit toward the taxes due by the owner. An annual election must be made on the pass through entity’s original, timely-filed Idaho tax return. Once the election is made, it is irrevocable for that tax year. The election must be signed by all members of the electing entity or by an officer, manager, or member with authorization to make these decision on behalf of all other owners. Payments can be made using the Idaho State Tax Commission’s QuickPay, a business’ existing TAP account, or by mailing in a check with Idaho Form 41ES. The entity’s tax must be paid prior to the filing of the owner’s tax return in order to be applied to a return filed for the same year. ABE payments are deductible in the year they are paid, so a payment made before December 31, 2022 will be deducted on the owners 2022 tax return. If the amount paid is more than the owner’s Idaho tax liability, the excess is refunded. If you own an interest in a pass through entity and are looking for ways to lower your federal income tax bill, you may want to consider whether an ABE election would work for you. Contact your tax professional to see if this is an option for you and how much tax could be saved.   Construction & Engineering Page   [...] Read more...
June 27, 2022by Margaret Flowers Are you holding onto an investment property and looking at the property values climbing? Have you considered if this is the time to sell the property? Do the taxes on the gain from the schedule have you sweating buckets? Have you considered the possibility of doing a 1031 exchange to cash in the gains and avoid the taxes on the gains, but realized that you would have to buy a new property? If you have looked at possibly selling your existing investment property, you may have considered doing a tax-free exchange under section 1031 to avoid the tax on the large capital gains on the property (and the potential recapture of the depreciation you have claimed over the years). In researching the rules for the 1031 exchange, you may have come across the requirement to identify the replacement property within 45 days of the close date of the sale. In this real estate market, properties are selling quickly upon listing so to identify the replacement property and actually close on that property are getting extremely difficult. You can identify multiple properties to help protect your 1031 transaction, but once you identify more than three properties, there are rules about the market value of the identified properties exceeding the value of the property you want to sell. This can create a stressful environment or can be downright prohibitive from successfully executing a 1031 exchange. Another issue to consider is if you are considering selling an investment property because you no longer want to be involved in the management of said property, you are looking to retire or reduce the amount of time spent on the property. In order to have a successful 1031 exchange you need a replacement investment property which will create the need to manage the property, thereby undermining your goals in selling your original property. Enter the Delaware Statutory Trust (DST). Since 2004, the IRS has allowed investors to do a 1031 exchange from an investment property into a DST and continue to defer the gain. The Delaware Statutory Trust is a fractional ownership in an packaged investment of real estate properties. The Companies that offer these have several options depending on your desired investment term and investment goals. The properties generally are managed by the companies offering the investment so you can step back into a more passive role while maintaining the integrity of the 1031 transaction and maintaining cash flow from the properties. Because the packages are generally established, the identification requirement of the replacement property is able to be done quickly so that you can meet the rules required under section 1031. If you have been debating doing a 1031 exchange but thought that the market forces currently at play were prohibiting you from successfully completing a 1031 transaction, you may want to consider looking into the Delaware Statutory Trust. You will want to consult your tax professional to see what the implications of doing so are and how much the tax savings would be to see if this is something you should consider.     Construction & Engineering Page   Real Estate Page   [...] Read more...

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