CONSTRUCTION Accounting Article -
4 Reasons to Engage in Some Midyear Tax Planning

Target Audience: Construction Industry Professionals, Contractors, Construction Business Owners, Construction Accountant Interest, Construction Management, Tax Law Changes and Updates, Tax Updates Interest, Tax Planning Interest, Accounting Consulting Firm News and Updates Interest

Although you probably have plenty on your plate at the moment, don’t let that fact keep you from engaging in some midyear tax planning. For starters, you’ll be making your life easier come year end when you’ll really need to start thinking about taxes. Want some more specific reasons? Here are four.

1. To Save on Equipment Acquisitions

The Section 179 deduction allows you to expense, rather than depreciate, up to $250,000 in new equipment acquisitions for 2008. This amount was raised from $128,000 with the signing of the Economic Stimulus Act of 2008 earlier this year.

Before you run off to start shopping, though, there are some things you should know. The deduction applies to machinery and equipment, including office equipment and light trucks, that are put in service before year end. It also applies to certain software purchases.

The equipment doesn’t have to be new — it just has to be new to you. But, to qualify, it must be used at least 50% for business in the first year you own it. You can deduct only the business-use percentage of the cost, and for vehicles there are weight-related limits on the deductible amounts.

Additionally, for 2008, your Sec. 179 deduction is decreased if you spend more than $800,000 on equipment. This phaseout amount was also raised (in this case from $510,000) with the signing of the stimulus act.

Also bear in mind that, under the act, some property may qualify for a special depreciation amount equal to 50% of its adjusted basis. Such property includes tangible property with a recovery period of 20 years or less, computer software purchased by the business, water utility property, and qualified leasehold improvement property.

Because both the Sec. 179 limit increases and the 50% depreciation allowance are generally available only for 2008 and can provide large 2008 deductions, you may want to consider making major asset purchases this year, assuming it makes good business sense to do so.

2. To Grab the Energy Tax Credit

If you have energy-efficient new homes under construction, try to get them completed and sold before year end. That’s when a tax credit of up to $2,000 for each energy-efficient new house is set to expire.

More specifically, a buyer must acquire it from you for use as a residence before Jan. 1, 2009. There are other criteria, as well. For example, the house must be located within the United States, and it needs to meet statutory energy-saving requirements. Ask your tax advisor to give you a complete explanation of this potentially valuable opportunity.

3. To Better Plan Job Progress

Now is a good time to start thinking about where your projects will stand at year end. If you use the completed-contract accounting method (available only to smaller construction businesses), you can’t deduct job costs or record income until the job is complete.

Look at your overall tax and business situation to see whether it might be better to delay completion of some jobs so you can report the income next year. Conversely, it might be better to make sure all jobs are finished by year end so you can deduct the costs this year.

If you’re like most contractors, you probably use the percentage-of-completion accounting method and, thus, report income and expenses as they are incurred. In this case, there may be tax advantages to pushing delivery of some materials to next year — if you can do so without hurting job progress.

More specifically, because the goods aren’t delivered to the job site, you don’t incur the costs and, therefore, you may recognize a lower percentage of gross profit for tax purposes. (Of course, this assumes there will be a gross profit and not a loss.)

4. To Look into Hiring Your Kids

Do you have children on summer break from school who are old enough to work? If so, you may hire them and fully deduct their pay. And, if your construction business is unincorporated and has no owners other than you and certain family members, and your children are under age 18, you won’t owe any payroll or unemployment taxes on their wages.

Your kids get a tax break as well. They can earn as much as $5,450 (the 2008 standard deduction for singles) and pay no federal income tax. They can tack on $5,000 more tax-deferred if they contribute it to a traditional IRA. Bear in mind that your children must perform actual work and receive wages reasonably similar to what a nonfamily employee would receive.

Act Prudently

Midyear tax planning is, indeed, an excellent business practice. But it comes with a caveat: Never make a move for tax purposes if it isn’t also a good business move. Your CPA can help you ensure that you’re acting prudently from both perspectives.

Sidebar: Another Reason to “Think Taxes” — Strategic Planning

For many contractors, the late spring and summer months are “busy season.” Thus, it’s understandable that you might not care to do much tax planning right now. Yet, along with the four reasons mentioned in the main article, another great reason to engage in some midyear tax planning is strategic planning.

For instance, as you and your CPA go over your finances, looking for potential tax breaks, you may realize that business isn’t going quite as well as you expected. The good news here is that there’s still time to adjust. You can look into cutting expenses or maybe seeking out smaller jobs rather than a big one that could stymie your cash flow.

And if you’re doing better than you planned, great! You’ll be able to consider equipment purchases, computer upgrades, investments and other moves to grow your company.

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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