Tax Reform Changes Affecting Contractors

As a contractor, you are likely to see a number of changes to your tax bill because of the most recent reform. Some of the most notable changes include:

A new pass-through deduction

If you operate as a pass-through entity, the new tax reform will allow you to deduct up to 20 percent of your business income, thus reducing your total tax liability. This deduction will be limited for taxpayers whose income exceeds a certain limit. If your income is greater than this threshold amount, your deduction will be limited to the greater of 25 percent of your W-2 wages plus 2.5 percent of qualified property or 50 percent of your W-2 wages.

Bonus depreciation has increased

The new law increases the bonus depreciation to 100 percent for most types of property. Previously, the limit was 50 percent. You can apply this new limit to any property placed in service after September 27, 2017. However, this increase will last only until 2023, when it will begin to be phased out by 20 percent per year until it disappears entirely.

The section 179 deduction is increased

The recent tax reform leaves the section 179 provision intact and increases the annual limit to $1 million. However, because of the increase to bonus depreciation, it is unlikely that this deduction will be used as frequently in coming tax years.

Tax rates were reduced

The new legislation reduced tax rates for pass-through entities and corporations. Corporations will now pay a tax rate of 21 percent, down from the prior top rate of 35 percent. The top tax rate for individuals and pass-through entities fell from 39.6 percent to 37 percent. Some of the other tax rates applied to individuals and pass-through entities also changed.

No more Alternative Minimum Tax for corporations

After the new legislation was enacted, the Alternative Minimum Tax was eliminated for C corporations. However, if you operate your business as a pass-through entity or a sole proprietor, the AMT remains intact. Owners of these types of businesses may still benefit from the legislation, as the AMT phase-out limits and exemptions have increased significantly.

These are just a few of the changes from the most recent tax legislation that will affect contractors. If you are concerned about how these new provisions will affect you, it’s best to consult an experienced accountant. Please contact Klein Hall CPAs today to learn more.

The Section 179D Policy Has Been Extended

Energy efficiency is a priority for both individuals and companies, in countless industries. However, for some, energy efficiency means more—especially when it comes to saving big on taxes. For developers, the passage of these kinds of tax credits can mean huge savings, including the benefits available under 179D. With energy efficient policies recently addressed in Congress, it’s possible to continue saving with this valuable tax option.

What is Section 179D?

The Section 179D Policy Has Been ExtendedSection 179D is also known as the Energy Efficient Commercial Building Deduction. This particular option allows for an immediate credit of up to $2,000 total, or $1.80 per square foot, one of the best options available for those involved in every aspect of commercial development.

As a federal tax incentive that promotes energy-efficient building projects, the policy outlined under 179D allows commercial builders, including those working on government buildings, to save big on construction that meets the code. With the potential benefits for professionals involved in building, including architects, contractors, environmental consultants, engineers, and energy services providers, Section 179D opens doors for countless aspects of the building process. Further, Section 179D isn’t just for new construction. Building improvements are also included for construction that occurred between 2006 and 2016, adding additional ways to save. With options ranging from HVAC systems to lighting, there are plenty of opportunities to qualify.

2018 Renewal

Despite the uncertain state of the current tax environment in the United States, the activities on February 9th, 2018 offered a big advantage for those involved in commercial development. The “Tax Extender Act of 2017” was filed in Congress at the end of December, a proposal that included the extension of 179D, but was ultimately unsuccessful. However, the inclusion for 2017 and beyond did not come until the passage of “The Bipartisan Budget Act of 2018,” which was recently signed by President Trump. This budget package lifts limits on spending caps until March 23rd, 2018 and retroactively extends several tax measures, including Section 179D, just in time for the 2017 tax season.

Previously, 179D, as well as 45L, expired as of December 31, 2016.

What This Means for You

So, what does the extension of 179D mean for you?

Well, if you’re not involved in commercial construction, this change doesn’t mean much. However, for those who take an active part in construction projects, this change makes all the difference, allowing for significant savings that would have been otherwise unavailable.

It’s important to understand the limitations of this policy before choosing to take a credit. Only building components included in the act that expressly relate to energy savings will apply; simply working on a building with sufficient energy efficient fixtures doesn’t necessarily qualify.

Not sure if Section 179D  is right for you? That’s okay. At Klein Hall CPAs, we’re prepared to ensure you save as much as possible on your 2017 taxes. From savings on personal events to deductions on your business taxes, we’ll help you put money back in your pocket. Contact us today!

Construction and Contractors: The Basics of the Month-End Close

Contractors benefit from having a regular monthly closeout of the company’s accounting because having accurate, up-to-date financial reports helps executive management with forecasting, and improves decision making.

The closeout process consists of reconciling significant balance sheet and income statement accounts including but not limited to:

  • Cash
  • Accounts Receivable
  • Fixed Assets
  • Accounts Payable
  • Credit Cards
  • Debt
  • Payroll

The monthly close process also includes the preparation and analysis of the Work-In-Progress schedule.

Step-By-Step Procedures for the Monthly Closeout

1) To reconcile cash, each deposit and withdrawal item from the monthly bank statement is reconciled to the accounting system to ensure all transactions were recorded and agree to the bank. It is also important to analyze any outstanding checks or deposits that did not clear the bank in a timely manner to ensure the transactions are recorded properly and received by the payee.

2) The accounts receivables balance should be reviewed by making sure all invoices have been posted for the current period and making sure all  payments received have been applied properly. Additionally, it is important to review the accounts receivable aging report for items that have potential collectability issues, which are typically invoices that are older than 60-90 days past due depending on your typical payment cycle of your customers.

3) Fixed assets accounts need to be reviewed to record any fixed asset additions or disposals for the period and to record the necessary depreciation adjustments. The Income Statement should also be reviewed for large expense items that may have inadvertently been expensed that should be capitalized.

4) To calculate the accounts payable, first, a cut off day is chosen (which is usually after the first week of the month). Next, vendor invoices that come in before the cut off day are posted to the general ledger. Any invoices coming in after the cut off day are posted on the following month. Any other vendor liabilities that are not invoiced but are known to the company are accrued at the monthly close with an adjustment to the accounts payable account. It is important to review monthly vendor and subcontractor statements to make sure all invoices are in the accounting system and properly job costed. A review of the accounts payable aging report should be done for credits that can be taken and review of any old unpaid invoices.

5) The monthly credit cards statements are reconciled to the general ledger making sure transactions are posted to correct expense accounts and job costed as necessary.

6) For other debt accounts, such as loans, notes payable, and credit lines, the balances should agree to the loan amortization schedules and lender statements ensuring the principal and interest payments have been applied properly.

7) The payroll accounting entries are verified to make sure each employee’s time is allocated to the correct job or expense account. All payroll liabilities are reviewed to make sure any required withholdings are paid to the employee tax authorities on time.

8) The Work-In-ProConstruction/Contractorsgress (WIP) schedule accounts for the progress of construction jobs from their beginning to completion on a percentage basis. Using the WIP schedule is necessary to convert revenues from an accrued basis to a percentage-of-completion basis in order to determine any under or over billings to the clients. Verifications of the current year’s revenues and job costs are made by adjustments to the general ledger. This makes sure the cost to complete each project is accurate and that the revenues and profits from each job are recognized correctly. The WIP schedule is used to help the company’s management track profitability and can provide information about profitability by job type, project manager, customer, job size, location, and other factors.

9) After all the adjustments have been made to the general ledger accounts, the financial statements are prepared as reports for management’s review, which include a balance sheet, income statement, A/R aging for collectability analysis, and the up dated WIP schedule.

Klein Hall CPAs specializes in helping contractions and construction businesses with accurate accounting to better manage their operations. Contact us for any of your accounting needs.

The Importance of Cash Flow for Contractors

In all industries, cash flow is important. Without a regular influx of cash, it can be hard to take care of essential parts of your operations, like paying employees, fulfilling purchase orders, paying subcontractors, and managing payables and receivables. Cash can be a sticking point for many, and can create big debt issues that can be hard to come back from when not managed properly. Whether you know it or not, cash on hand can be your best friend in business.

As a contractor, you likely don’t have much time to tackle the accounting side of your business since you are likely focusing on project management, but a thorough understanding of cash flows can make a big difference. Here’s why cash matters.

Projecting Earnings

Cash Flow For ContractorsEven if finances aren’t really your specialty, the ability to forecast earnings is a key aspect of operating a successful business. Without comprehensive knowledge of what’s going in and what’s going out, it can be extremely hard to anticipate your overall income for any given period of time, including throughout the duration of a project. If you’re not sure when cash is coming in, you’ll struggle to budget for the future with any certainty. Everything from fees and interest on loans to project timelines can be affected by your understanding of cash flows, so failing to keep tabs on payments can cost you more than you realize.

Schedule Planning

A good contractor never goes into a job blind. If you have a big project coming up, the best way to stay on track and on budget is to plan your business around your cash flows. Say, for example, you have a construction project on the horizon. Instead of showing up with a team project and seeing how things play out, you’ll want to plan your progress down to the day to ensure you maximize earnings and net as much money as possible. Comprehension of cash flows can help here, allowing you to base billing schedules on anticipated needs, average turnaround times, potential cost escalations, and more.

It is critical on the front end of the job to make sure billing deadlines are met and in the proper hands to start the payment cycle. Depending on the type of project and funding source, payment could take anywhere from 10 days to 90 days to receive payment. Knowing this at the beginning of the job will help you anticipate cash flow needs and help you determine when you are paying suppliers and Subcontractors. The more you know, the better you can prepare, ensuring every obligation is covered with ease.

Efficient Operations

Do you have enough cash to rent equipment today, or will your spending jeopardize your rent payment next week? If you pay your team this Friday, will you have to slow progress on your project spending to keep bank accounts in the black? These kinds of questions should be easily answerable, but a lack of knowledge is how many contractors get into hot water. Assuming there’s enough cash and knowing there’s enough cash are often two different things. Making payments in haste can lead to big interest charges, work delays, and payroll errors, slowing down your momentum with easily avoidable problems. With a solid grasp on job progress and cash flows, however, you can keep projects moving forward with confidence.

Understanding cash flow can be a challenge but it is essential in keeping your projects and business running smoothly. Professional assistance from Klein Hall CPAs can help you make the most of your business, letting experts handle your cash flow management while you focus on what you do best. Get in touch today to learn more!

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Why Recordkeeping Matters for Your Small Business

The first days for a small business can be exhilarating, especially for new entrepreneurs. However, in the midst of your startup celebrations, it’s important to stay focused on what matters most: setting the foundation for overall success. For virtually all companies, that means a comprehensive approach to recordkeeping.

Even the best ideas in the world will fail when not accompanied by a strong recordkeeping system. How you organize the information coming in and the information going out is a critical component to startups, and a late start in tracking income, expenses, cash flow, and more can put you in hot water down the road. If you want to give your small business the best chance at long-term stability, maintaining strong records should be your number one priority.

Why Recordkeeping Matters

Small Business RecordkeepingWhen your business is in the beginning stages, every little detail counts. Where each cent of revenue comes from, exactly how much you’re investing in overhead, and the breakdown of metrics like ROI can be the difference between seeing warning signs early or catching a problem only after it’s too late to remedy. Financial systems, bookkeeping, and payroll programs affect everything from tax filings to paying your team members, and without an easy way to access critical information, you may find yourself missing deadlines and falling behind.

If you’re not quite sure how to establish a foundation for proper, organized recordkeeping, you’re not alone. The foresight necessary to properly structure management systems for growth isn’t necessarily intuitive, and a few mistakes now can cost you significant time and money later. Instead of leaving your records up to chance, professional assistance can put you on the right track.

The Advantages of Professional Records

Professional records can have a huge impact on your business, especially as your company experiences growth and change. With assistance from professional CPAs with backgrounds in business finance, taxation, payroll processing, and bookkeeping, you can offer your fledgling company significant advantages, including:

  • Simplified tax preparation, including audit, payroll tax, and sales tax support
  • A better overall grasp of your financial situation
  • Simple financial statement generation
  • Optimized opportunities for financial planning and analysis
  • Improved efficiencies throughout your business

When Records Fail

The wrong recordkeeping system may not seem like a big deal, especially when your business is at the starting gate without complex transactions or years of history to review, but a few wrong moves today can be costly tomorrow.

When your management systems can’t account for all transactions, you may find yourself with a distinct lack of necessary information and no way to fix it. This can be especially impactful should your business come under audit, if fraud occurs, or your company is eventually sold to a third party. Additionally, if something happens to you, adequate records may be required to help your company continue under new leadership.

In business, it’s always better to be safe than sorry, and your recordkeeping practices are a big part of appropriate oversight. From filing taxes properly to ensuring your employees are paid correctly and on time, bookkeeping, financial management, and payroll systems should be a central part of your day to day operations.

If you want to make sure you’re on the right track from the moment you open your doors, professional assistance from Klein Hall CPAs can give you the boost you need. Contact us today to learn more about how we can help your small business!

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How Does Financial Statement Presentation Affect Bond Capacity?

A contractor’s bonding capacity is the highest amount of surety credit a bonding company will allow for the contractor. Typically, bonding capacity is given in terms of the largest single-project dollar amount a surety company would issue, and also the maximum total amount of bonding a contractor holds at any given time.

So what determines the amount of bonding capacity a surety company is willing to grant a contractor? The most influential factor in arriving at this decision is the manner in which the contractor’s financial statement is presented. It is a given that the financial statements should adhere to generally accepted accounting principles (GAAP). Let’s examine three important characteristics that pertain to financial statement presentation and how it affects bond capacity.

Cash-Based vs Accrual-Based Accounting

For many businesses, cash-based accounting is utilized because it is cost-effective, faster, and easier. Unfortunately, this type of accounting is not an option for contractors. This is primarily due to the fact that revenue from longer jobs is frequently not recognized until the job is completed entirely, which can roll over into the next year.

Accrual-based accounting is a more complete and accurate way of bookkeeping when the contractor’s accounts receivable and accounts payable are taken into account. This method also has the advantage of allocating revenues and expenses for jobs as they are actually incurred. Work-in-progress jobs often have over billings and under billings, which can dramatically affect the financial picture. Surety companies are unable to get an accurate assessment of a contractor’s financial situation unless accrual-based accounting is used.

Accuracy of the Financial Statements 

There are three different levels of assurance when referring to financial statements that are prepared by a CPA: compiled, reviewed, and audited. Compiled financial statements are the contractor’s numbers presented in the standard financial statement format with no obvious errors. This level of assurance may not be enough to secure bonding. A review provides more value to a surety company, as with these financial statements the CPA has performed inquiries and analytical procedures. An audit is the highest level of assurance required for the purposes of bonding. In an audit, the CPA will perform procedures beyond inquiries and analytical procedures, including observation, testing, and confirmation of financial data.

What Can Be Interpreted from the Numbers?

The surety underwriters who determine the bonding capacity from a contractor’s financial statements focus on the available working capital and equity. Working capital is calculated by deducting current liabilities from current assets, and equity equals total assets less total liabilities. An often-cited metric for working capital is that it must be 5-10% of the contractor’s total backlog, or cost to complete current projects. Therefore, it is obligatory for the contractor to understand and abide by this benchmark so their bond capacity is not threatened.

A contractor’s financial statement preparation and presentation is one of the largest factors in determining how large of a bonding capacity the surety company will grant. Choosing the right method of accounting (accrual-based), ensuring the financial statements are at the level required and prepared by a CPA, and keeping the numbers in line with the surety company expectations are all important considerations when discussing bonding capacity.

Please feel free to contact us at Klein Hall CPAs if you have any questions regarding this matter.

Are My Moving Expenses Tax Deductible?

Has a new job prospect ever asked you to pick up and move? After celebrating your new job offer, you realize that you are not close enough to commute. You will have to pull up your stakes and find a new place to live in order to start employment. The cost and inconvenience of moving for a new job could actually be tax deductible. When tax time comes, moving expenses can qualify as write-offs.


Moving Expenses Can be Deducted

There are three points you need to meet in order to write-off your moving expenses on your taxes. First, the move must closely relate to the start of your new job. If you have to move within a year of starting your new position, that qualifies. Second, your new job must be at least 50 miles further from your old home than your previous job was. So, using the distance test, if you used to live two miles from work, your new job has to be at least 52 miles away to qualify. And finally, you will have to work full-time at your new position for at least 39 weeks after you move. If you are self-employed, it needs to be 78 weeks within the first two years.

What Can You Deduct?

Some examples of deductions include the cost of boxing, crating, and moving your possessions. You can also deduct the cost of travel and lodging for yourself and your family (though not the cost of meals).

For more information on what you can and cannot deduct from your taxes when you move because of your job, simply contact us today!

Construction Accounting: Building Books As Strong As Structures

Construction companies excel at raising an impressive edifice from the foundation to the roof. Taking the steps to avoid a few common construction accounting errors can ensure that their financial reports are as strong as their structures.

One of the first common mistakes includes failing to establish a system to account for costs recorded after a project period has closed. While receiving invoices after a project is complete may regularly occur, failing to reconcile these costs with the proper project can create statement inconsistencies and lead to late payment deliveries. To avoid this error, an article in Construction Executive recommends companies set up a voucher system. Through this process, these late-received invoices can be scheduled for payment through accounts payable even after a project completion date.

In several other situations, seemingly small underestimates can have a large impact on closing project costs. Companies can take the first step toward avoiding lost revenue incurred by low estimates by simply applying a monthly cost review process to projects. This system can help identify repeated estimation inconsistencies while also identifying where updated changes should be made due to cost increase in materials or labor.

Similar errors in estimating can occur when companies fail to consistently monitor any changes in overhead costs, including rent and utilities. The water access required for a masonry company’s mortar mix, for example, or the gas powering generators used for on-site nail gun operation can steadily rise in price without adequate adjustment if not monitored. Accounting professionals recommend establishing an annual review of these costs as well as the method used to compute these costs—–either a percentage of material costs or director labor—–to make sure the most effective rate is being applied.

Yet another area that can affect business revenue includes improper documentation of joint venture partnerships. While these collaborations can allow a company to grow by accepting larger projects and/or expanding its geographic reach, failing to establish the proper financial guidelines at the beginning can lead to accounting and payment errors. An accurate joint venture agreement should clearly state the percentage of participation of each company, therefore correctly distributing costs and profits.

In addition to these common mistakes, the IRS lists detailed rules for the type of accounting records construction companies may employ as well as additional guidelines and restrictions within those methods. For example, companies established as a corporation or partnership with annual gross receipts in excess of $5 million are not allowed to employ the cash method of accounting and instead are required to use the accrual method.

While the financial guidelines applicable to a construction enterprise can appear overwhelming, there are many software programs and professional accountants who can offer expertise to ensure that your business’s books are as solid as the building your company creates. To help remove the paperwork headaches and strengthen your company’s bottom line, contact the accounting professionals at Klein Hall CPAs.

Omitting Forms Can Extend Your Audit Period Indefinitely

Most of us do our best to avoid an IRS audit by declaring all of our income and resisting the urge to fudge on our expenses. Even with the best of intentions, we can still make mistakes with far-reaching consequences. Omitting certain forms or even forgetting to sign your return can allow the IRS an unlimited period of time to audit it.

How long does the IRS have to audit my return?

Generally, the IRS has three years to audit a return, either from the date of filing or the due date of the return, whichever is later. In certain situations, that statute of limitations can extend six years or more. In the case of unsigned returns, there is no starting date for the audit period, which extends it indefinitely.

The six-year period applies to taxpayers failing to declare more than 25% of the gross income reported on their return or more than $5,000.00 in income from a foreign source. However, despite prior Supreme Court rulings that under-reporting income from the sale of property did not constitute omitting income, Congress recently broadened the definition of omission.

In July of 2015, President Obama signed legislation permitting a six-year auditing period in cases of overstatement of cost basis that cause the omission of more than 25% of the gross income. In an article for Forbes in January, 2016, tax lawyer Robert Wood gave this example.

“You sell a piece of property for $3M, claiming that your basis (what you invested in the property) was $1.5M. In fact, your basis was only $500,000. The effect of your basis overstatement was that you paid tax on $1.5M of gain, when you should have paid tax on $2.5M.”

Making a mistake calculating your basis and getting an extra three years of audit time is bad enough, but if you have foreign income to report, the stakes are even higher.

Taxpayers with foreign income, beware of omitting these forms.

“Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts,” said Christina Klein, CPA, MST and Senior Partner at Klein Hall CPAs in Naperville, IL.

If you received gifts and inheritances from foreign sources, you may be required to file Form 3520, or 3520-A even if your foreign trust had no transactions during the tax year. Taxpayers holding foreign assets such as accounts or shares of foreign companies may be required to file Form 8621. As in the case of an unsigned return, if you fail to file these forms, your return will have no specified start date for an audit and the statute of limitations cannot not begin running.

Controlled foreign corporations, or CFC’s, in which a United States citizen holds 50% of a foreign company’s stock, must be especially careful. According to Robert Wood’s article in Forbes on March 3, 2014, in addition to an unlimited auditing period, failure to file Form 5471 will get you a $10,000.00 penalty and further penalties for forms that are incomplete, incorrect or late. If this form applies to you, you must file it, even if there is no tax due for the reporting period.

The statute of limitations on collections by the IRS is normally 10 years, but that time can be extended for various reasons including non-compliance by the taxpayer with the payment agreement and an increase in the taxpayer’s income during the payment period.

Get help filing correctly.

With so much at stake, why risk making a costly error? Contact us at Klein Hall CPAs for expert tax preparation and a wide range of financial services for individuals and businesses, with or without overseas interests.

Quick List of Smart Tax Moves for 2016 and Beyond!

Even though “tax season” is behind us, there are still plenty of steps you should consider in 2016 and beyond to protect your tax interests. With this in mind, we’ve come up with an important list of smart tax moves you can make in 2016… and beyond!

  • Periodically review your portfolio, or have a professional do it for you. There is no such thing as an “always-gaining” stock, and there are certainly ways you can both save money and earn dividends without compromising your tax status.
  • Avoid buying mutual funds at the end of the year. If you plan to purchase mutual funds, aim for purchasing during the first quarter of any year.
  • Give to charity in goods, services, and money. The more you give to charity, the more you can claim as a tax refund.
  • When you give money to family, you don’t necessarily have to “claim” it on your taxes; as long as you keep the number under $14,000 per year. If you are married, that number applies to both yourself and your spouse, meaning you can give almost $30,000 a year to each of your family members without worrying about tax penalty.
  • Though each retirement case is different, if your needs warrant it, you can consider converting your regular IRA to a Roth IRA. Talk to your tax professional or attorney to make sure that this is the right legal and financial move for you.

For more tips and advice, or information about us and our services, don’t hesitate to contact us today.