With 2010 ushering in a very uncertain tax
climate, construction contractors should keep in mind the following tax tips
provided by Grant Thornton LLP:
1. Make the most
of your net operating loss deduction. Recent tax legislation
opens up opportunities for taxpayers of all sizes to choose an extended
carryback period for net operating losses. This provision allows contractors
who have NOLs to choose a five-year, four-year or three-year carryback period
(increased from the normal two-year rule) for NOLs incurred in a tax year
beginning or ending in 2008 or 2009.
Keep in mind, however, that only a single
year can qualify for this enhanced carryback period. Taxpayers with NOLs in two
or three qualifying years need additional analysis to maximize their cash
refunds.
2. Take a hard
look at bonus depreciation deductions. As an incentive for
investment in equipment, taxpayers are allowed to deduct half of the cost of
2009 qualifying property in the first year of use, and then depreciate the
remaining half of the asset over its normal useful life. For five-year
equipment (the most common tax life for construction equipment), this allows a
deduction of 60 percent of the asset’s cost in the first year of its life.
Careful planning is required to make sure
this deduction is right for you.
3. Analyze the
business structure. For decades, tax experts have advised their
contractor clients to organize as pass-through entities. Alignment of corporate
and individual tax rates, combined with the ability of an individual investor
to minimize capital gains on the sale of a business, made this a solid tax
strategy. However, current deficits and potential tax changes may alter this
landscape.
In the current tax climate, significant
future individual tax increases are very possible, while corporate rate
increases are unlikely. As a result, contractors should look at their business
structure with an eye toward potential restructuring.
4. Consider future
capital gains and dividend tax rate increases. Under current law,
capital gains and qualified dividends are taxed at a favorable 15 percent
federal income tax rate. This preferential treatment is scheduled to expire at
the end of 2010 and individuals (absent a law change) will face higher taxes on
these items in 2011. Taxpayers with significant capital gains transactions
should work with tax advisers to analyze whether accelerating capital gains and
dividends into 2010 is a prudent tax move.
5. Take full
advantage of capital asset expensing deductions. Rules originally intended
for small businesses were significantly expanded to allow contractors to
expense up to $250,000 of 2009 fixed asset costs, provided less than $800,000
of assets were placed in service throughout the year. Unlike bonus
depreciation, this applies to new or used assets. However, this deduction
cannot be taken if a contractor is already in a tax-loss position.
6. Determine
whether the company can lower property taxes. A property tax review can
ensure that real and intangible property is excluded from the personal property
tax base. In addition, there may be opportunities to lower the property tax
valuations on real property. The review would not only generate savings in the
first year, but also in future years.
7. Examine
capital asset depreciation methods and lives. Depreciating fixed assets
is one of the most complex aspects of tax law. Understanding and properly
applying these rules can accelerate income tax deductions, and these deductions
often add significantly to the current tax flow. For contractors who have
underreported prior depreciation, recent IRS guidance allows “catch-up”
deductions with an automatic change in accounting methods.
8. Review
deferred compensation plans. Contractors who struggle with profitability often
cannot revert to past practices of awarding large bonuses to retain key
employees. This is the time to look at additional benefits besides
profit-sharing and 401(k) plans. Nonqualified plans can give employers the
ability to choose which employees to cover. Often limited to key employees, a
properly drafted plan can provide incentives that align with a contractor’s
strategic plan and provide employees a powerful incentive to remain with the
company.
9. Consider
establishing a separate entity to own and lease fixed assets used in the business.
Often
referred to as leasing or procurement companies, these entities help manage
assets and may significantly reduce sales-and-use tax, which is collected and
remitted regardless of whether a company is profitable.
10. Consider not
deferring income. The traditional wisdom of deferring income for tax
purposes deserves another look. With many government entities looking for
increased tax revenues, new tax policies and rate increases are very possible.
At the current time, individual taxpayers are a target. With tax increases
scheduled for 2011, taxpayers would be well-advised to consider whether
deferring taxable income is still the most cash-efficient option.
“To learn how these tax
tips may apply to your contracting business, please contact your tax advisor,”
said
Todd Taggart, tax partner and practice leader
of Grant Thornton LLP’s Construction practice.
For additional information, visit
www.GrantThornton.com/CRHtaxtips.
