CONSTRUCTION Accounting ARTICLE -
Tax planning for 2008 and beyond: Looking forward by looking back

Target Audience: Construction Industry Professionals, Contractors, Construction Business Owners, Construction Accountant Interest, Tax Year End Planning and Strategic Planning Interest

As a new calendar year begins, construction business owners may want to look back to last year for some strategic planning cues. For example, the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA) included more than $4.8 billion in tax breaks for businesses.

The law extended some temporary tax breaks for several years, making it easier for you to plan strategically for this year and beyond.

Work Opportunity Tax Credit

Is your business struggling to cope with the construction industry’s long-standing labor shortage? If so, you’ll want to consider one of SBWOTA’s most noteworthy provisions: the extension and expansion of the Work Opportunity Tax Credit (WOTC).

If you hire members of certain physically or economically disadvantaged groups, you may qualify for the tax credit, which can be as much as 40% of the first $6,000 in wages you pay eligible full-time employees during their first year on the job. If the qualifying employee works more than 120 hours but less than 400 during the year, the credit is 25% of eligible wages. Thus, you may get a tax credit of $2,400 or $1,500 per qualifying employee.

To be eligible, an employee must begin work before Sept. 1, 2011. He or she also must be part of one of the following nine targeted groups:

1. Recipients of temporary assistance to needy families,

2. Veterans receiving food stamps or, new under SBWOTA, with service-related disabilities who have been unemployed for at least six of the 12 months preceding their hire dates (if hired within a year of discharge or release from active duty),

3. Ex-felons hired within a year of their conviction or release from prison,

4. High-risk youth (ages 18–24) who live in federally designated empowerment zones, enterprise communities or renewal communities,

5. Vocational rehabilitation referrals,

6. Qualified summer youth (ages 16 and 17) who live in federally designated empowerment zones, enterprise communities or renewal communities,

7. Qualified food stamp recipients,

8. Qualified Supplemental Security Income recipients, or

9. Long-term family assistance recipients.

The qualified wage threshold for the expanded veterans’ groups is $12,000, rather than $6,000. That means hiring qualified veterans can give you a tax credit of up to $4,800.

Section 179 expensing deduction

Are you thinking about making some major equipment purchases in the next several years? If so, SBWOTA brought good news. The act increases Section 179 expensing provisions through 2010.

Under Section 179, you could expense up to $125,000 in qualified property in 2007 rather than depreciating it. That’s up from $108,000 in 2006 — and the limit will increase further for the 2008 through 2010 tax years, when it will be indexed for inflation.

In addition, the Section 179 acquisition limitation (the maximum you can spend on qualified property without being required to reduce the amount you expense) was increased from $430,000 to $500,000 for the 2007 tax year. It also will be subject to cost-of-living adjustments for the 2008 through 2010 tax years.

S corporation provisions

When the sale of qualified S corporation stock ends a qualifying subchapter S election (because the subchapter S is no longer wholly owned by the S corporation), the transaction now will be treated first as a sale of undivided interest in the assets of the qualifying S corporation and then as a tax-free incorporation.

For example, before SBWOTA, if a construction company was an S corporation that owned 100% of another S corporation for which it later sold a portion of the stock, the contractor would recognize any gain on the deemed sale of the underlying assets of the company. Under the new law, the contractor would have to recognize a gain only on the underlying assets equal to the percentage of stock sold.

All the right moves

While many temporary tax incentives are renewed annually, renewal isn’t certain. And renewals often are approved too late in the year to allow you to plan around them. Right now, however, construction companies have a few years of certainty on which to make tax-saving business improvement moves. Work with your tax and business advisors to make all the right moves for your construction company.

Sidebar: Run the business with your spouse? Good news!

If you and your spouse jointly operate your construction company and haven’t incorporated the business, the Small Business and Work Opportunity Tax Act of 2007 may help ensure that you both get credit for paying Social Security and Medicare taxes. In the past, you were treated as a partnership for federal tax purposes and you attributed all the income from the company to one spouse.

Now, married couples who file joint returns may account for their share of the company’s income, expenses, gains, losses and other financial dealings as separate sole proprietors rather than filing partnership returns and two Schedule K-1s. Each spouse reports his or her share of income on a joint Form 1040.

To qualify, couples must be the only owners, and both spouses must be material contributors to the business.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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