CONSTRUCTION Accounting ARTICLE -
Year end tax planning - Construction Accounting Tips 2011

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

As year end rolls in, contractors should be on the lookout for smart ways to reduce their tax burdens and boost their cash flows. Many of the incentives included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and other 2010 legislation are set to expire at the end of this year (though Congress might extend them). So now is a good time to start exploring ways to lock in those breaks and lower your 2011 tax bill.

Hiring and the Work Opportunity Credit

Contractors who downsized during the recession may be able to score some tax savings by adding personnel now. The Tax Relief act extended the Work Opportunity credit for employers that hire workers from certain disadvantaged groups, such as disabled veterans, ex-felons and people who receive food stamps or other supplemental income from the government.

The credit may provide tax savings equal to as much as 40% of the first $6,000 in wages for each new hire ($12,000 for qualified veterans), and you can claim the credit for an unlimited number of workers. Businesses that are in government-classified federal empowerment zones, or that hire employees from these areas, may qualify for additional credits.

But act quickly: These credits are scheduled to expire at the end of 2011.

Energy efficiency

Whether you’re constructing houses or government offices, check out current tax incentives for energy-efficient buildings. The Tax Relief act provides qualified contractors with a $2,000 tax credit for each home they build that meets certain efficiency standards. You must sell the home by the end of 2011 to qualify.

In addition, construction companies that install energy-efficient lighting, heating and cooling, or building envelope systems for publicly funded projects, such as libraries and schools, can tap into tax deductions of up to $1.80 per square foot. This incentive applies mainly to design-build contractors, because a business must design the energy-efficient system to qualify. This break is available through 2013. (The building must be completed before Jan. 1, 2014.)

Research and experimentation

An extension of the research credit (often referred to as the “research and development,” “R&D” or “research and experimentation” credit) included in the Tax Relief act covers expenses accrued in 2010 and 2011. The credit can be calculated in one of two ways:

1. The traditional research credit is equal to 20% of qualified research expenses over a defined base amount related to your gross receipts and previous research spending.
2. The simplified credit is equal to 14% of any spending for that year that’s over 50% of the average of your annual research expenses for the previous three years.

The research credit is especially useful for design-build contractors, because designing a building falls under developing or improving a business component — which is a qualified expense. Other qualified expenses relevant to contractors include researching new building materials, improving plumbing systems and performing CAD modeling.

Tax Savings on New Construction equipment

If you’ve been waiting to invest in a new crane, this may be the time to do it. Enhanced bonus depreciation and increased Section 179 expensing limits offer significant tax savings on qualified asset purchases — including machinery, equipment, vehicles and furniture.

Normally, you would need to deduct the cost of a big-ticket purchase over a number of years. With bonus depreciation, however, you can deduct 100% of the cost of qualified assets acquired and placed in service this year on your 2011 tax return, and 50% of the cost of qualified assets acquired and placed in service next year on your 2012 return. The amount of qualified property on which you can claim bonus depreciation is unlimited, but the property must be new.

Increased limits on Sec. 179 expensing offer another way to save. For tax years that begin in 2011, you can deduct up to $500,000 of qualified asset purchases. However, for each $1 of purchases in excess of $2 million, your deduction will be reduced by $1. For tax years starting in 2012, the deduction limit is scheduled to drop to $125,000 and the purchase limit to $500,000, though both amounts will be indexed for inflation.

Both new and used property qualify for Sec. 179 expensing. Off-the-shelf computer software also qualifies, making now a smart time to consider upgrading your technology.

More ways to save

In addition to possibly qualifying for the opportunities outlined here, you may be eligible for many other tax incentives. Discuss your options with your tax advisor to make sure you’re saving as much as you can.

Cost segregation studies offer bigger tax savings than ever

Cost segregation studies can help property owners shave a significant amount from their project costs — and bonus depreciation incentives in place through 2012 may mean even bigger tax savings for the people and entities that bring business to you.

Commercial buildings typically must be depreciated over 39 years. But, by separating out building assets that have shorter tax lifetimes (such as fixtures, flooring and landscaping), owners can take deductions for those items sooner rather than later. Cost segregation studies target such assets, thereby accelerating applicable tax deductions.

Bonus depreciation included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 speeds up the tax savings even more, because many of the assets identified during a cost segregation study qualify for bonus depreciation. (See main article.)

Although cost segregation studies don’t put more dollars in your pocket (unless you own the property on which you’re building), helping owners complete them can strengthen your relationships with these parties. You can also establish your construction company’s reputation as a specialist in this area.

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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