CONSTRUCTION Accounting ARTICLE - Small Business Jobs Act Extends Tax Carryback

Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants

The Small Business Jobs Act (SBJA), enacted last year, contains a prime tax-saving opportunity for contractors. An SBJA provision includes an extended five-year “carryback” for general business tax credits to offset both regular tax liability and alternative minimum tax (AMT) liability. The provision applies to sole proprietorships, partnerships and nonpublicly traded corporations that have $50 million or less in average annual gross receipts over the three preceding tax years.

An outdated system

A carryback is essentially a function of the tax code that allows you to apply an unused tax credit for a certain year to a tax liability from a previous year. (An election needs to be filed to identify years of the carryback.) Some of the business credits available to contractors include those for building energy-efficient homes and using green fuels in their fleets, as well as credits for providing health insurance to employees and hiring workers from certain disadvantaged groups.

But under the old laws for the general business credit (a broad category comprising a variety of business-related tax credits), contractors often couldn’t use the credits for which they qualified. The general business credit set a cap on the total amount of credits a business could collect, limiting the overall credit amount to a company’s net income tax less either 25% of its tax liability beyond the first $25,000 in taxes or its AMT payment, whichever was greater.

For the credits that invariably went unused, the IRS gave businesses a one-year carryback, allowing them to apply the credits to their previous year’s liability, as well as a 20-year carryforward on future tax liabilities.

Welcome relief

With new construction slowing and profits dwindling in recent years, however, a one-year carryback didn’t provide the immediate tax relief that many contractors needed. So, thankfully, the SBJA introduced an extended five-year carryback. Along with letting you apply unused tax credits to up to five years of previous tax returns, the new law also allows you to apply business credits for the first time to any AMT liability you incur.

The five-year carryback applies only to credits earned in a fiscal year that began after Dec. 31, 2009. So if your construction business doesn’t operate on a calendar year, you can use only the business credits that you accrued once your new fiscal year began in 2010.

Critical dollars

Work with your construction accountant to determine whether you’re eligible for a carryback. Also ask him or her about the recently passed Tax Relief act, which extended many existing tax law provisions.

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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