Tax Strategies for the Construction Industry
It is no secret that the construction and real estate industries have been particularly hard-hit by the economic downtown over the past several years. Many businesses in these industries have struggled to survive, incurred losses in their businesses, had trouble getting financing and have had to layoff many of their employees. Tax strategies have not been the primary focus in this business climate.
There are many issues relating to construction and real estate that should be considered as we begin to emerge from the economic downturn. As you start looking at the preparation of the tax return for your business for 2011 remember to look at whether your construction business qualifies for these tax credits and tax saving provisions:
New Energy Efficient Home Credit where an eligible contractor can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year. This credit expired as of Dec. 31, so the 2011 tax year may be the last chance to apply this credit.
Credit for Small Employer Health Insurance Premiums. Designed for small employers in all industries who have less than 25 full-time-equivalent employees.
New Hire Retention Credit for employer who hired employees after February 3, 2010 and before January 1, 2011 and have been retained by you for at least 52 weeks. The maximum credit is $1,000 for each qualifying employee. You will want to look at those employees who signed from W-11 in 2010 when they were hired.
Domestic Production Activities Deduction. Construction activities may qualify for the Domestic Production Activities Deduction This deduction (not a credit) allows the construction company to deduct a percentage of their income from qualifying activities from taxable income. This deduction is in addition to the normal expenses of operating the business.
Bonus depreciation on qualifying new property. 100% for 2011 and 50% for 2012.
Fixed Asset Acquisitions. Make sure you are using the correct class life for fixed asset acquisitions. Many of the personal property assets used in the construction industry qualify for the five year class life.
Other issues directly affecting businesses in the construction industry include:
– A renewed interest by the Federal and State government in the classification of workers as Independent Contractors versus employees. The IRS has a 20 factor test that they use to determine whether or not the worker has been properly classified. Those individuals who receive a 1099 year-after-year form the same company will likely be scrutinized. The State of Michigan has also taken an aggressive stance in this area. If the worker is reclassified as an employee upon examination by the Federal or State government it is not only the payroll tax issues that arise but the workers ability to participate in company sponsored retirement plans and fringe benefits.
– Multi-state tax issues have arisen when construction businesses start working in other states to keep their workers busy. Generally, when you have physical presence in another State your business will have "Nexus" in this state which may require you to pay income and payroll taxes to that State. What constitutes nexus varies state-to-state so you would need to consult your tax advisor if this situation is applicable.
– The IRS has issued new guidance on deduction vs. capitalization of tangible property costs. The temporary regulations are generally effective for tax years beginning after 2011 and apply to the treatment of amounts paid to acquire, produce or improve tangible property. These regulations will be of particular interest to your customers who are having buildings constructed by your business.
– Cost segregation studies are still a viable consideration. Cost segregation is a tax strategy that separates building components into various asset classes and allows for the accelerated depreciation of some building components. The accelerated depreciation of the shorter-life asset classes may result in significant tax savings during the early years of a project and improve cash flow at an important time. The goal of the cost segregation study is to identify property that can be depreciated as personal property over five or seven years or land improvements which have a 15-year life. The accelerated depreciation of these short-life classes is far greater than if an asset were classified as part of the building resulting in the deduction being spread over 39 years. Typically, by conducting a study, 20 percent-40 percent of the property value can be reclassified as personal property from real property.
This article is geared primarily to contractors. Additional strategies can be pursued for real estate investors. Those who own a parcel of vacant land and are interested in developing it should contact a tax professional for additional information on tax saving strategies.
As with all tax recommendations, every situation is unique. Please confer with a tax professional to discuss the most appropriate strategies as they apply to each specific case.
Lois Roper Forrester, CPA, is a tax manager at Dennis, Gartland & Niergarth. She brings significant experience in construction accounting with close to 25 years experience in the industry. For more information, contact 231.946.1722 or www.dgncpa.com.