Country / Language

Year-End Tax Planning Tips for Construction Companies


12/22/15

As year-end approaches, most company owners start to consider their tax liability and should work with their tax advisors to take the necessary steps to minimize it. While there is no one-size-fits-all approach to year-end tax planning, there are some key points to keep in mind for all businesses, as well as some that are unique to construction companies.
 
Timing
 
It’s critical to take a strategic approach by looking ahead to 2016. Generally, the best strategy is to minimize your 2015 taxes by deferring income to next year and accelerating deductions into this year. However, if you expect to be in a higher tax bracket in 2016, it may make more sense to accelerate income into 2015 and defer deductions until 2016.
 
There are various ways to defer income and accelerate deductions. Companies using the cash-basis method of accounting have the most opportunities to defer billings into next year or to prepay certain expenses. Companies using the accrual-basis method of accounting are more limited, but still have opportunities. They may be able to defer income by delaying the performance of certain services until after year end or by electing to defer taxes on advance payments received this year for services that will not be performed until next year.
 
Accrual-basis companies can deduct year-end bonuses that are not paid until next year, as long as the payments are made by March 15, 2016. In order to qualify for the deduction, the payments must not be made to “related parties,” such as S corporation shareholders or partners.
 
Both accrual-basis and cash-basis companies can claim a deduction on this year’s return for qualified retirement plan contributions as long as they are made by the extended due date of the 2015 tax return.

Evaluating Accounting Methods
 
A company’s accounting method can have a major impact on its tax liability, as discussed above when comparing cash-basis and accrual-basis. Most flow-through entities (partnerships and S Corporations) without inventory are eligible to use the cash basis regardless of their gross receipts level. Many construction companies use the accrual method of accounting, although most are required to use the percentage-of-completion (PCM). PCM recognizes revenues and expenses as a job progresses to account for long-term contracts. There are exceptions that allow construction companies to use the completed-contract method (CCM) to defer taxable income until a job is substantially complete. Companies should work with their accountants to ensure the appropriate method of accounting is being used.
 
Construction companies that perform home construction, such as single-family homes and townhouses, are typically exempt from PCM accounting. In addition, a hybrid method can be used for residential contracts, such as apartment buildings. In this case, 70% of gross profits are recognized using PCM while 30% use the company’s normal accounting method.
 
Even if a job requires PCM accounting, the“10% method” should not be overlooked if the job commences late in the year. This allows a company to defer recognition of gross profit on jobs that are less than 10% complete at year-end. This method is adopted by making an election with the 2015 tax return. Applying for a change in accounting method is not required. If the ”10% method” is elected, it will apply to all jobs that are less than 10% complete at the end of the year and all future years.  A decision to switch to another method in a later year will require IRS approval.
 
Companies using PCM accounting should review job schedules cautiously before year end for any adjustments in estimated revenues and costs. This can help to avoid over-reporting income in the current year if profits on a job are declining.
 
Utilizing Tax Breaks
 
Leveraging available tax deductions and credits may also reduce the 2015 tax liability. Some of the tax breaks require companies to take a particular action before year-end. However, many do not and simply need to be claimed on the company’s tax return.
 
Bonus Depreciation and Section 179
Bonus depreciation allows businesses to deduct 50% of the amount used to purchase new equipment while Section 179 allows businesses to deduct, rather than depreciate, 100% of the equipment purchased. Both of these tax breaks have limits and restrictions that should be carefully considered, such as the equipment or software that is considered qualified property. Also, bonus depreciation cannot be taken on used equipment while Section 179 expensing requires a company to have net income for the year.
 
On December 18, 2015, both the enhanced Section 179 expensing and the 50% bonus depreciation tax breaks that expired at the end of 2014, were restored by Congress as part of the “Protecting Americans from Tax Hikes Act of 2015”. By extending these provisions retroactively, there is still the opportunity to minimize the 2015 tax liability by acquiring depreciable assets before year-end. The Section 179 provision permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014. It also sets new thresholds at $500,000 and $2 million, raised from the amounts of $25,000 and $200,000, respectively. The bill also extends bonus depreciation an additional five years through 2019.
 
R&D Credit
Another tax break that was permanently renewed as part of the “Protecting Americans from Tax Hikes Act of 2015,” is the research credit. Commonly referred to as the “research and development,” or “R&D” credit, it may be available for certain construction or engineering developments. R&D expenditures are generally deducted as current year expenses in the tax year in which they were paid or incurred. These expenditures can also be amortized over a period of not less than 60 months if an election is made to capitalize the costs. The R&D credit is a nonrefundable tax credit that can be claimed against tax for certain qualified R&D expenditures, and may be combined as one of the components of the general business credit. The permanent R&D tax credit, for the first time, allows for eligible small businesses to claim the credit against the alternative minimum tax liability or against the employer’s payroll tax liability.
 
Section 179D Deduction
The Energy-Efficient Commercial Buildings Deduction (Section 179D), is often overlooked by construction companies. A deduction of up to $1.80 per square foot is available to the owner of a building at the time it is constructed or when a renovation is made. Typically, the deduction follows the entity that is otherwise depreciating the building. For government-owned buildings, there is a special provision that allows the owner to allocate the deduction to the building’s "designer" (engineer, contractor, architect, environmental consultant, or energy services provider) for the taxable year in which the property is placed in service. Similar to the above tax breaks, on December 18, 2015 Congress extended the Section 179D deduction an additional two years through 2016.
 
Section 199 Deduction
Construction companies can also minimize their tax liabilities by claiming the manufacturer’s deduction, commonly referred to as the “Section 199” or “domestic production activities” deduction. This tax break allows companies to deduct up to 9% of income from “qualified production activities” associated with constructing or substantially renovating real property located in the United States.
 
Tangible Property Regulations
Construction companies may also be able to accelerate repair and maintenance expense deductions by applying the recently released tangible property regulations. The IRS issued final Tangible Property Regulations (TPR) in 2014. This clarified the rules on what are considered improvements that must be depreciated, and what qualifies as repairs to tangible property (including buildings and improvements) that may be expensed currently. There are safe harbors allowing taxpayers to currently deduct routine maintenance costs that are expected to be performed more than once during the property’s service life. 
 
The TPR contain a “de minimis” safe harbor that allows companies to deduct amounts under certain dollar thresholds as long as those amounts are also deducted for financial statement purposes.  Companies with both: (1) a written “de minimis policy” as of the first day of the tax year, and (2) an “Applicable Financial Statement” (AFS) may deduct (for tax purposes) amounts that are deducted for financial statement purposes – not to exceed $5,000. For companies without an AFS, the TPR set the de minimis limit at $500 instead of $5,000. On November 24, 2015, the IRS published Notice 2015-82 which raises the de minimis safe harbor for companies that do not maintain an AFS to $2,500. The IRS indicated that, even though the Notice is effective for tax years beginning on or after 1/1/2016, the IRS will not challenge use of the new $2,500 threshold in tax years prior to 2016.
 
The Work Opportunity Tax Credit (WOTC) is also available for companies hiring workers from certain disadvantaged groups, such as qualified veterans and ex-felons.
 
Other Considerations
 
For many company owners, the provisions of the Affordable Care Act (ACA) just started taking effect in 2015. There are different requirements that may affect tax liability and fees depending on whether the company is defined as small or large business under ACA. If a company has fewer than 25 full-time employees earning an average of less than $50,000 per year, and covers at least 50% of their health insurance premiums, it may be eligible for a tax credit. However, if the company self-insures, it is required to report certain information for covered employees and could also be required to pay a fee to help fund the Patient-Centered Outcomes Research Trust Fund.
 
Large companies with 25 or more full-time employees face new reporting requirements for 2015, including reporting the value of the coverage provided to each employee on their W-2 forms. An annual return must be filed in 2016 to report certain information about the health insurance provided. If large employers do not offer adequate coverage as defined under ACA, they may be required to make a payment under the ACA’s employer shared responsibility provisions. The ACA is ever-evolving and time sensitive. Companies should make arrangements with their payroll service providers to ensure they are in compliance with the provisions of the ACA.
 
What Does CohnReznick Think?
Finding the best approach for year-end tax planning can be very complicated and, at times, tricky. Some strategies discussed above for reducing taxable income may impact strong year-end financial statements. Particular attention must be given to make sure tax decisions do not negatively impact the financial statement presentation that banks and sureties look for, such as for loan covenants or bonding capacities. It is critical to consult a tax advisor about the latest updates and strategies best suited for your construction business.
 
Further, it is crucial to maintain detailed and thorough documentation of financial activities throughout the year to allow for efficient and accurate filing of tax returns. This will allow tax advisors to be more productive in identifying the top tax issues impacting a company’s tax liability.

 
Contact
 
For more information on 2015 year-end tax savings opportunities, as well as other tax issues that could impact your company, contact your CohnReznick tax professional or Jack Callahan, Partner and Construction Industry Practice Leader, at jack.callahan@cohnreznick.com or 732-380-8685.
 
To learn more about our Construction Industry Practice, visit our webpage.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More