Midwest Construction Law Teleseminar

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Midwest Construction Law Teleseminar February
20, 2008
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Recent (2007) Legislation

• Small Business and Work Opportunity Tax Act
• Extended 179 expensing to 2010 (125,000 expense
  limit 500,000 investment limit)
• Family Business Simplification husband and wife
  sole members of LLC need not file a partnership
  return (consider impact on Social Security taxes
  and benefits)
• Kiddie Tax changes increased age from 14 to 18
  and students under 24 (effective for 2008, not
  2007), to tax unearned income at parent rates

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Recent (2007) Legislation, cont

• Work Opportunity Credit (Federal) extended to
  8/31/11
• 40 of wages up to first 6,000 of wages if
  employee works at least 400 hours 25 if 120-400
  hours worked (up to 2,400 per employee) credit
  amount
• Employee must live in Rural Renewal County
• Employee must be age 18-39
• Contact the state within 28 days of employment
  for certification
• Minimum 120 hours per employee (doesnt have to
  be employed all year)
• May apply to regular and AMT tax (but not
  refundable)

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Recent (2007) Legislation, cont

• Tax Increase Prevention Act of 2007 (AMT
  Patch)
• Extension of increased exemptions (44,350
  single 66,250 MFJ)
• Unused AMT Credits unused before 2013 may be
  claimed as a refund (limited to 20 of the
  credits, or if greater, the lesser of 5,000 or
  full amount of the credit subject to phase-out
  limitations similar to personal exemptions)
• Nonrefundable credits may offset AMT liability

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Recent (2007) Legislation, cont

• Mortgage Forgiveness Debt Relief Act of 2007
• Exclude foreclosure debt forgiveness (up to
  2,000,000 of original acquisition/construction
  debt) from income (loan must have been forgiven
  1/1/07 12/31/09) basis in home reduced by
  forgiveness
• 3-yr extension of mortgage insurance premium
  deduction (AGI under 110,000)
• Surviving spouse can continue to use joint
  personal residence exclusion (500,000) if home
  sold within two years of death
• Increased penalties for un-filed information
  returns (partnerships and S-corporations)

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Recent (2007) Legislation, cont

• Energy Independence and Security Act of 2007
  (several tax incentives in this bill were not
  approved but likely to be resurrected in 2008)
• Energy Conservation Bonds
• Extension of energy efficiency improvements to
  existing homes and appliances (thru 2008)
• Extension of energy efficiency improvements to
  commercial buildings (thru 2013)
• Extending research credit

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Expiring Tax Relief Provisions

• Tax relief provisions enacted in 2001 and 2003
  are currently set to expire at the end of 2010
  not likely to be extended by Congress in an
  election year (if elected, Clinton will let these
  expire and push for further increases McCain
  says he will make the tax relief cuts permanent
  and will veto any proposed tax increases and
  eliminate AMT with the war to finance and
  current economic conditions, extension is not
  likely)

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Expiring Tax Relief Provisions, cont

• Capital gains rates (currently 15, or 5 for
  taxpayers in the 10-15 bracket 5 becomes 0 in
  2008 all expire 2011)
• Section 179 expense election (reverts back to
  25,000 in 2011)
• Estate tax exclusion reverts to 1,000,000
  exclusion in 2011 (3,500,000 in 2009 unlimited
  in 2010)
• 15-year life on qualified leasehold and
  restaurant improvements (expires 2007)

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Expiring Tax Relief Provisions, cont

• Above line deduction for qualified tuition and
  related expenses (for 2007, max deduction was
  4,000 if AGI less than 130,000 on a joint
  return 2,000 if AGI is 130,000-160,000
  expires 2007)
• Enhanced charitable deduction for conservation
  easements and food and inventory, computer
  equipment for education (expires 2007)
• Tax-free distribution from IRAs to charity
  (expires 2007)

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Expiring Tax Relief Provisions, cont

• Domestic Production Activities Deduction 6 of
  production income in 2007 increases to 9 in
  2010 (contractors qualify for this deduction on
  most non-service contracts) limited to 50 of
  wages
• Sales tax deduction instead of state income taxes
  (expires 2007)
• New Markets Tax credit to businesses locating in
  qualified low income neighborhoods (expires 2008)
• RD credit (expires 2007)

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Expiring Tax Relief Provisions, cont

• Expensing costs of clean up of contaminated sites
  (expires 2007)
• Certain tax credit bonds issued by states and
  local governments to help repair schools,
  purchase school equipment and train teachers in
  economically distressed areas (expires 2007)

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Recent Proposed Legislation

• Economic Stimulus (2008 Act)
• IRS will provide checks (600 for singles 1200
  for couples 300 per child) to qualifying
  individuals (subject to income limitations less
  than 75,000 AGI for singles or 150,000 AGI for
  couples)
• Increases to Sec. 179 expensing levels to
  250,000 for 2008 and 50 bonus depreciation the
  first year

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Recent Proposed Legislation, cont

• Rangel proposes increases for high income
  taxpayers (over 200,000 joint AGI) and decreases
  for low income taxpayers (in form of credits)
• Higher tax rates on ordinary income (deferring
  income to later years will likely be at higher
  rates deferring expenses will provide more
  benefit)
• Higher tax rates on dividends (including closely
  held corporate dividends) and capital gains
• Repeal LIFO and lower of cost or market inventory
  methods

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Recent Proposed Legislation, cont

• Reduce top corporate tax rate from 35 to 30.5
• Increase NOL carry back provision
• Benefits for veterans
• S-corporation shareholders to be subject self
  employment taxes, similar to current service
  partnerships
• Increase 15 year life to 20 years on intangible
  assets

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Recent Proposed Legislation, cont

• Reduction of dividend received deduction for
  corporations
• AMT (will it be repealed at a cost of nearly 800
  billion over 10 years?)
• Farm specific tax incentives, many tied to
  alternative fuels and energy

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409A (Non-qualified Deferred Compensation)

• Make sure compensation agreements meet 409A
  requirements otherwise, amounts may be currently
  taxable to the employee even though they do not
  have current access to the income to pay the tax
  and are not deductible to the contractor
• Amounts deferred are still subject to
  FICA/Medicare even if 409A requirements are met,
  when amounts are no longer subject to risk of
  forfeiture (i.e. fully vested)

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FIN 48 and Circular 230

• More Likely Than Not criterion
• FIN 48 requires that ALL material uncertainties
  on the tax return be identified, measured and
  disclosed on the financial statements to be GAAP
  compliant (without regard to audit risk)
  consider the following
• Contractors are on the hot seat when it comes to
  financial and tax reporting complexity!
• Accounting methods used overall and on specific
  contracts, and requirements for changing methods
  (are the methods permitted? Have changes been
  accounted for correctly?)

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FIN 48 and Circular 230, cont

• Consider
• Costing procedures and burden rates
• Inventory
• Depreciation methods and lives
• Timing of reporting income and cost over several
  periods
• Impact on financial statements of all
  compensation (current and deferred) and fringe
  benefits
• Look-back reporting done, and done correctly?
• Estimates used need to be reasonable and
  documented
• Effect of uninstalled materials on the tax
  calculation of PCM (included for tax, not for
  GAAP)

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FIN 48 and Circular 230, cont

• Consider also the recent proposed change in
  definition of homebuilders will impact method
  of accounting allowed for tax purposes (no longer
  allowed to use exempt method and subject to AMT),
  potentially exposing the entity to larger tax
  liabilities (fewer contractors will qualify as
  homebuilders but condominiums will now fall
  under the definition)

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FIN 48 and Circular 230, cont

• Circular 230 (and IRC Section 6694) requires tax
  preparers to meet the More Likely Than Not (gt
  50) standard when signing a tax return in order
  to avoid preparer penalties and professional
  sanctions (with disclosure, the standard is
  lowered to a "reasonable basis") prior law only
  required a one-in-three possibility of being
  sustained on the merits to avoid penalty (with
  disclosure, the standard was lowered to
  "non-frivolous")

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Accounting Methods

• Large contractors Although required to use PCM,
  there are many elections that can still be made
  that help to defer income on specific contracts
• Contracts less than 10 complete may defer
  profit by using an exempt method
• Exclude retainage from PCM calculations (defer
  profit by reducing percentage of completion)
• Home contracts (may use exempt method, not
  subject to AMT preference)
• Residential contracts may use exempt method on
  30 of these contracts

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Accounting Methods

• Small Contractors
• Consider all exempt methods available to defer
  profit the cash method works great when tax
  planning is more critical than working capital
• When approaching the 10,000,000 threshold,
• consider switching methods the year before forced
  to do so (more flexibility to use exempt methods
  on specific contracts)
• carefully review the gross receipts (tax basis,
  not financial statement basis exclude items like
  intercompany receipts, internal equipment
  rentals, and sales tax collected from customers)
• must aggregate affiliated groups gross receipts

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New State Issues

• Kansas franchise tax threshold at 1,000,000 (vs.
  100,000)
• Kansas personal property tax relief
• Texas imposes a margin tax on all business
  entities, including partnerships

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Entity Structure

• Consider income tax, estate tax, management
  succession and credit with Surety
• Real estate in a pass-through entity, separate
  from operations
• Operations in a C-corporation, LLC or
  S-corporation?
• Equipment with operations or in a separate
  equipment leasing company?

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Contacts
David N. Allison, CPA, CCIFP Director, CBIZ
Accounting, Tax Advisory Services, LLC (NYSE -
CBZ) Shareholder, Mayer Hoffman McCann P.C., An
Independent CPA Firm  11440 Tomahawk Creek
Parkway Leawood, Kansas 66211 Work 913.234.1299 F
ax 913.234.1100 Cell 785.845.1560 Email dalliso
n_at_cbiz.com
Gwynne L. Reid, CPA Director, CBIZ Accounting,
Tax Advisory Services, LLC (NYSE -
CBZ) Shareholder, Mayer Hoffman McCann P.C., An
Independent CPA Firm  11440 Tomahawk Creek
Parkway Leawood, Kansas 66211 Work 913.234.1913
Fax [phone] Cell 816.726.4724 Email greid
_at_cbiz.com
Construction brochure link  www.cbiz.com/construc
tion