Tag Archives: Tax

What the PATH Act Means for You

The Protecting Americans from Tax Hikes Act (“The Act”) was signed into law by the President on December 18, 2015. The Act includes a number of significant tax changes. Some of the more important changes effective after December 31, 2014, (unless indicated) are as follows:

R&D Credit – The Act retroactively and permanently extends the research credit and may be used as an offset against Alternative Minimum Tax (AMT) in certain situations. No changes were made to the calculation method of the R&D credit.

R&D Credit – Offset against AMT. The Act provides that the R&D credit can be claimed against an AMT offset for an eligible small business (ESB), which is defined as a business with $50 million or less of gross receipts effective January 1, 2016.

R&D Credit – Offset against payroll taxes. Effective after December 31, 2015, the Act provides that a qualified small business (QSB), which is defined as having gross receipts of less than $5 million in current year and not having gross receipts for more than $5 million in the prior year, is eligible to offset their R&D credit against their payroll taxes. The maximum payroll tax offset is $250,000.

Section 179 – The $500,000 expensing limitation and $2 million phase-out amounts are retroactively extended and made permanent; after 2015, the limits are indexed for inflation.

Section 179 – The rule that allows expensing for off-the-shelf computer software is retroactively extended and made permanent.

Bonus Depreciation – The Act extends bonus depreciation for qualified property acquired and placed in service during 2015 through 2019 (50% for 2015-2017, 40% for 2018, and 30% for 2019).

Qualified Leasehold Improvements – The Act retroactively extends and makes permanent the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year Modified Accelerated Cost Recovery System (MACRS) class.

Built-In-Gains Tax – The Act retroactively and permanently provides that for determining the net recognized built-in gain, the recognition period is a 5-year period.

Work Opportunity Credit – The Act retroactively extends the work opportunity credit so that it applies to eligible veterans and non-veterans who begin work for an employer before January 1, 2019. With respect to individuals who begin work for an employer after December 21, 2015, the credit applies to employers who hire certain qualified unemployed individuals. The credit with respect to such long-term unemployed individuals is 40% of the first $6,000 of wages.

Empowerment Zone Tax Incentives – The Act extends for two years, through December 31, 2016, the period for which the designation of an empowerment zone is in effect.

New Market Credit – The Act retroactively extends the new markets tax credits through 2019. It provides up to $3.5M in qualified equity investments for each calendar year from 2015 through 2019. The carryover period for unused new markets credits is extended through 2024.

Exclusion of Gain from Certain Small Business Stock – The Act retroactively and permanently extends the 100% exclusion and the exception from minimum tax preference treatment.

Tax-free IRA Transfers to Charities – The Act retroactively and permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from IRAs of up to $100,000 per year.

Mortgage Insurance Premiums – The Act retroactively extends this provision for two years so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before January 1, 2017.

Qualified Tuition Deduction – The Act retroactively extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education.

American Opportunity Tax Credit (AOTC) – The Act makes the AOTC permanent.

Child Tax Credit (CTC) – The Act makes the enhanced CTC permanent by setting the threshold dollar amount for purposes of computing the refundable credit at an unindexed $3,000.

Look-through Rules for Payments between Related to Controlled Foreign Corporations (CFC) under the Foreign Personal Holding Company Income — The Act retroactively extends the look-through treatment for related CFC’s for five years making it applicable to qualifying CFC’s for tax years beginning on or before January 1, 2020, and to the tax year of US shareholders with or within the tax years of the qualifying CFC end. This rule provision generally permits the tax treatment of the receipt of dividends, interest, rents, and royalties income items as non- foreign personal holding income (FPHCI) sources and does not require immediate income inclusion for US tax reporting purposes provided that such income items under the look through provisions are determined to be attributable or properly allocable to non-subpart F income, or such income items are determined to be not effectively connected with the conduct of a US trade or business of the payer.

 

Tax Compliance Series for Construction Contractors: Worker Classification

compliance-series-cisg-icon-01Due to the nature of construction work, it is common for companies to face challenges related to understanding whether a worker is considered an “independent contractor” or “employee” in the eyes of the IRS. In the final post of Aronson’s Tax Compliance Series for Construction Contractors, we focus on an important issue for employers: worker classification.

Hiring a worker as an employee has costs beyond their wages. Such costs include:

  • Hard costs (e.g. payroll taxes, unemployment taxes, insurance)
  • Compliance with the regulatory requirements of having an employee
  • The added administrative burdens of payroll and the support of a human resources department

In a perceived cost-savings measure, some business owners continue to be tempted to hire workers and treat them as independent contractors. Nonetheless, the decision to classify someone as an independent contractor as opposed to an employee demands careful consideration for both federal and state purposes in order to avoid unnecessary and costly consequences. This has been a contentious issue for contractors of all sizes, but particularly for small contractors.

The degree of control the owner has over a worker is one element evaluated by the IRS to determine proper worker classification.

  • If the worker is subject to strict supervision by the business owner with regard to time, place, and how, the worker is more likely an employee for whom wage withholding, unemployment taxes, insurance, etc., are required.
  • If the worker is only responsible for a completed service or product without strict supervision as to when, where and how the work is performed, the worker is more likely to be considered an independent contractor.

This is just one of many factors that are evaluated when determining proper worker classification. In addition, workers themselves are often aware of the classification issue. It only takes one former “independent contractor” to file for unemployment or classification determination to wreak havoc on your construction business. If you have any doubt about worker classification, now is the time to determine if you have properly classified your workers.

For more information on these common tax reporting issues, or to discuss how they may impact your construction business, please reach out to Chavon Wilcox, CPA, CCIFP, partner in Aronson LLC’s Construction and Real Estate Group at 301.231.6288.

 

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Tax Compliance Series for Construction Contractors: Tangible Property Regulations

compliance-series-cisg-icon-01Aronson’s IRS compliance articles have focused on a variety of important tax considerations for construction contractors. Today, we continue that tradition by taking a closer look at another common issue: tangible property regulations.

Tangible property regulations became effective for tax years beginning on or after January 1, 2014. The regulations provide guidelines covering materials and supplies, capitalized costs, and costs to acquire, produce, improve and dispose of tangible property.

A taxpayer generally must capitalize amounts paid to acquire, produce or improve tangible property. However, the IRS has provided a de minimis safe harbor election that can be filed on an annual basis to expense all items under a certain dollar amount or with a useful life of less than 12 months. The de minimus amount is $5,000 if you have an applicable financial statement (e.g. audited) and a written accounting policy. If you do not have these items in place, the safe harbor amount drops to $500. It is advised that these elections be filed annually regardless of your policy so that you can be protected for all items that fall below the threshold if ever questioned by the IRS.

While the regulations do provide certain benefits, they come with a fair share of compliance paperwork. Taxpayers will need to complete Form 3115, “Application for Change in Accounting Method,” and consider up to nine elections depending on the accounting methods used.

However, after the new regulations were issued, the IRS appeared to reveal a soft spot for small businesses as they established a small taxpayer relief revenue procedure. This relief permits qualifying taxpayers to adopt the new regulations prospectively without filling out all the required forms. In order to utilize the relief, taxpayers must have total assets of less than $10 million or average gross receipts of less than $10 million for the prior three taxable years. The relief does not exempt a company from making required elections based on its accounting methods used. All forms and elections are required when filing your completed tax return.

This is a significant opportunity available for a one time deduction, particularly in the area of real property you may use within your construction business. You should evaluate if the small taxpayer relief makes the most sense for your business, and whether you can obtain additional tax relief by taking advantage of the one-time deduction available.

For more information on these common tax reporting issues, or to discuss how they may impact your construction business, please reach out to Chavon Wilcox, CPA, CCIFP, partner in Aronson LLC’s Construction and Real Estate Group at 301.231.6288.

 

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Tax Compliance Series for Construction Contractors: Domestic Production Activities Deduction

Previous installments of Aronson’s Tax Compliance Series for Construction Contractors focused on methods of accounting, the lookback provision, and long-term contract adjustments. Today, we switch our focus to a fantastic opportunity to not only comply with IRS regulations, but benefit from a big tax deduction.

The Domestic Production Activities Deduction, created by the American Jobs Creation Act of 2004, is a gem! The deduction is equal to 9% of qualified production activities income (QPAI), limited to 50% of qualified W-2 wages paid for the year.

Qualified activities under this deduction include:

  • Residential and commercial construction
  • Infrastructure improvements
  • Land preparation activities
  • Architectural and engineering services

To calculate the deduction allowed, 9% is applied to the lesser of QPAI or taxable income for the tax year after the utilization of any Net Operating Loss (NOL) carryforwards. There are strict rules as to what is considered QPAI versus non-eligible activities; however, the IRS has permitted a de minimus calculation that can be beneficial to many contractors allowing 100% of their activities to qualify for the deduction. Not a C Corporation? Don’t worry. The deduction flows through to the stockholders and members of pass-through entities as well.

There are many situations where eligible contractors have not taken advantage of this very valuable deduction. Be sure you have!

For more information on these common tax reporting issues, or to discuss how they may impact your construction business, please reach out to Chavon Wilcox, CPA, CCIFP, partner in Aronson LLC’s Construction and Real Estate Group at 301.231.6288.

 

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Tax Compliance Series for Construction Contractors: Long-Term Contract Adjustment

compliance-series-cisg-icon-01In the first two articles in Aronson’s Tax Compliance Series for Construction Contractors, we explored the various methods of accounting available, as well as the lookback provision. This article will focus on the Long-Term Contract Adjustment (LTCA).

LTCA comes into play with our dear old friend, the Alternative Minimum Tax (AMT). The LTCA is an adjustment that must be computed on contracts that do not use the percentage of completion method of accounting. You must compute the gross profit earned on these contracts as if you were using the percentage of completion method and then compare it to your normal method. The difference between the two gross profits is the LTCA (positive or negative) used to determine your AMT.

There are two exceptions that exempt a contractor from computing this adjustment:

  1. The contract qualifies as a home construction contract
  2. The company is deemed a small corporation

Compliance in this area is often overlooked or, due to their complexities, computations are performed incorrectly. You should determine if you are subject to the LTCA provisions each year considering your method of accounting and revenue threshold.

For more information on these common tax reporting issues, or to discuss how they may impact your construction business, please reach out to Chavon Wilcox, CPA, CCIFP, partner in Aronson LLC’s Construction and Real Estate Group at 301.231.6288.

 

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