Following is a summary of the Stimulus Act's tax provisions*:
Rebate.
An eligible individual will receive a basic credit equal to the greater of:
1. his/her net income tax liability up to a maximum of $600 and $1,200 for a joint return (See below) or,
2. $300 and $600 for a joint return if either of the follow apply:
the taxpayer's qualifying income is at least $3,000; or
his/her net income tax liability is at least $1 and gross income is greater than the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return). Qualifying income is generally earned income, veterans' disability payments (including payments to survivors of disabled veterans), and social security benefits.
The amount of the rebate for single filers will get a maximum $600 rebate, which will phase out for taxpayers with adjusted gross incomes between $75,000 and $87,000. Married couples will get a maximum $1,200 rebate, which will phase out between
$150,000 and $174,000 in income. There will be an additional $300 per-child credit amount, which is also subject to phase out rates. The phase out rate is 5% of adjusted gross income (AGI) above $75,000 for single filers and $150,000 for joint filers. The rebate won't be available if an individual's tax return does not include valid identification numbers. A valid identification number is a
Social Security Number issued by the Social Security Administration, and does not include a Taxpayer Identification Number issued by the Internal Revenue Service.
Rebates are likely to be mailed in mid to late May. They would be based on 2007 tax returns.
Boosted Sec. 179 expensing.
For tax years beginning in 2008, the Stimulus Act will increase the $128,000 expensing limit to $250,000 and boosts the overall investment limit from $510,000 to $800,000. Bonus first-year
depreciation. The Stimulus Act permits a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2007, and before Jan. 1, 2009. The otherwise applicable "luxury auto" cap on first year depreciation will be increased by $8,000 for vehicles that qualify. The types of property eligible for bonus depreciation will be the same as those eligible under earlier bonus depreciation packages:
1. tangible property with a recovery period not exceeding 20 years;
2. purchased computer software;
3. water utility property; and
4. qualified leasehold improvement property.
Bonus depreciation will be allowed for alternative minimum tax (AMT) as well as for regular tax purposes.
Government-sponsored
mortgages.
The bill temporarily allows the government-sponsored mortgage finance companies Fannie Mae and Freddie Mac to buy individual home loans worth up to $729,750, up from the current limit of $417,000. The Federal Housing Administration would be allowed to insure loans as high as $729,750 as well, depending on the location.
*As passed by
congress, subject to change until signed into law.
FIN 48 and Your Construction Company's Financial Statements
Like other businesses that prepare financial statements in accordance with generally accepted accounting principles (GAAP), construction firms need to become familiar with a new accounting pronouncement known as "FIN 48." The Financial Accounting Standards Board (FASB) issued FIN 48, Accounting for Uncertainty in Income Taxes, to interpret Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The new accounting guidance applies to all types of entities, including C corporations, pass-through entities such as S corporations and partnerships, and real estate investment trusts.
Overview
Very generally, FIN 48 establishes the accounting for uncertain "tax positions" taken on a company's tax returns and addresses how those positions are to be reflected in the financial statements. The scope of the pronouncement is extremely broad -- FIN 48 governs the accounting for all material income-tax return positions taken (or which will be taken) that are reflected in measuring current or deferred income-tax assets and liabilities for interim and annual periods.
Since federal, state, and local tax laws are highly complex, many issues can arise in preparing a tax return, including issues related to income recognition, the allocation of income among taxing jurisdictions, and the deduction of expenses. Even the decision not to file an income-tax return in a particular state is a tax position that must be evaluated in the context of FIN 48.
The Nuts and Bolts of FIN 48
Meeting the complex requirements of FIN 48 will require businesses to determine and assess all material positions taken on their income-tax returns as of the date they adopt FIN 48, including uncertain positions, in all tax years that remain subject to assessment or challenge by the tax authorities.
According to FIN 48, businesses must undertake a two-step process in evaluating a tax position:
Recognition:
A business must determine whether it is "more likely than not" that a tax position will be upheld upon examination of its technical merits, including any related appeals or litigation. As part of this process, the business should always assume that the appropriate taxing authority -- operating with full access to and knowledge of all relevant information -- will examine the position. If a tax position doesn't meet the more-likely-than-not threshold, no tax benefit from the position may be reflected in the financial statements.
Measurement:
If a position meets the more-likely-than-not recognition threshold, it must then be measured to determine the amount of the benefit to recognize in the statements. The business has to measure the tax position based on the largest amount of tax benefit that is more than 50% likely to be realized upon final settlement with a taxing authority that has full knowledge of relevant tax information.
Differences between tax positions taken on a company's tax returns and amounts recognized in its financial statements will typically result in an increase in a liability for income taxes payable, a reduction in an income-tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability.
Ongoing compliance with FIN 48 will require businesses to track their tax positions based on any new information that may become available. This includes monitoring tax laws and court decisions (typically with the help of the company's professional advisors) to determine if changes or new laws could alter the recognition or the measurement of a tax position.
Interest and Penalties
A business must accrue interest and penalties that, under relevant tax law, would be incurred if an uncertain tax position were rejected. Under FIN 48, interest would begin accruing for financial statement purposes in the period in which it would begin accruing under relevant tax law. Any applicable penalties generally would be accrued in the first period in which the business claims or expects to claim the position on its return.
Disclosures
FIN 48 requires a reconciliation of the total amounts of unrecognized tax benefits at the beginning of the period to the total amounts of unrecognized tax benefits at the end of the period. Other disclosures required by FIN 48 include:
- Total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate
- Total amounts of interest and penalties recognized in the statement of operations and in the statement of financial position
- For positions in which there is a reasonable possibility that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date:
(1) The nature of the uncertainty
(2) The nature of the event that could occur in the next 12 months that could cause the change
(3) An estimate of the range of the reasonably possible change or a statement that an estimate of the range can't be made
- A description of tax years that remain subject to examination by major tax jurisdictions
Action Steps
For public companies, FIN 48 became effective for fiscal years beginning after December 15, 2006. The date for implementing FIN 48 requirements for private companies and nonpublic pass-through entities was recently delayed. Private firms not already implementing FIN 48 will have to comply for periods that begin after December 15, 2007. Implementing the requirements of FIN 48 may require a review of:
- Accounting policies
- Prior year financial statements for open tax years
- The results of prior income-tax audits
- Tax returns for all tax years where the statute of limitations has not expired
- Detailed trail balances for all legal entities for all open tax years
- All major acquisitions and dispositions in open tax years
Please feel free to contact us with questions regarding FIN 48 and to discuss its potential impact on your contracting firm's financial statements.
Federal "Good Samaritan" Legislation
Only 21 states have "Good Samaritan" laws, which protect responders working in emergencies and natural disasters from lawsuits for negligence. Since construction companies and their personnel have volunteered to help after numerous emergencies and disasters, construction industry groups are asking for federal "Good Samaritan" legislation. Non-residential Construction Shows Strong Growth
According to the Associated General Contractors of America (AGC), the non-residential sector of the construction market appears to be largely unaffected by troubles in the credit market. Government figures show that the lodging, office, and commercial construction segments all recorded gains through July of 2007. Construction in the lodging segment jumped 60% year-to-date, while private office construction rose 22% and commercial construction was up 15% for the same period. Other construction segments that did well in the first seven months of the year were power and private health care.. Forward Looking Index Points to Growth
Another good sign for the non-residential construction sector came from the American Institute of Architects, which announced that its July Architecture Billings Index recorded its second highest level in the survey's history. The index, which measures demand for architects' services, is an indicator for future construction activity.
Contractors nationwide are preparing to fight back against a law* that will
require federal, state, and local governments to withhold 3% from all payments
for goods and services. The 3% tax, slated to become operational in 2011, is
intended to guard against possible tax evasion by businesses.
With certain exceptions, the law requires 3% withholding on all government
payments for products and services made by all branches of government and their
instrumentalities (including multi-state agencies). The law will affect payments
for goods and services under government contracts and payments to any person for
a service or product provided to a government entity.
The New Law's Ramifications
The construction industry argues that it would be particularly hard hit by this
new withholding tax and objects to its imposition on several grounds. According
to the Associated General Contractors of America:
The government will essentially be withholding funds required to
complete a project since the withholding applies to the total contract and
not to the net revenue that a project generates.
The amount of the withholding will be equal to or greater than the
profit on many construction projects since general contractors, especially
those working as construction managers, do not typically make 3% profit on a
contract.
Federal law requires construction contractors to carry several types of
bonds. Typically, surety companies examine a contractor's cash flow before
opting to cover a contract. The new law will restrict cash flow for many
contractors, which, in turn, will affect the ability of contractors to
acquire bonding. Many contractors may end up paying higher-than-normal
premiums simply to acquire bonding, while others may be denied coverage.Â
Current laws require corporations to make quarterly estimated tax payments
toward their income-tax liabilities. In view of this requirement, the
imposition of an additional withholding tax is an unnecessary burden.
S corporations and joint ventures would face additional reporting since
withholdings need to be accounted for and reported to each shareholder or
partner. This increased reporting burden may end up reducing the number of
entities willing to take on large government projects.
We will keep you updated on any further developments as they relate to this
new law.
* The Tax Increase Prevention and Reconciliation Act of 2005, Section 511,
which amended Internal Revenue Code Section 3402(t).
". . . the law requires 3% withholding on all government payments for
products and services . . ."
Putting Together a Workable Incentive Compensation Plan
Attracting and retaining employees whose skills and commitment contribute
significantly to the growth and profitability of the business should be a
priority for every contractor. While high-performing project managers,
supervisors, and engineers are typically driven by their own high standards, a
satisfactory compensation package can often motivate them to continue performing
at peak levels.
Contractors have found that providing compensation "over and above" base pay has
helped retain and motivate key employees. Here's what you need to know if you
think you might want to introduce some form of incentive compensation plan into
your workplace.
What It Is
An incentive compensation plan is designed to tie pay to performance and to
achieve gains in worker productivity. A compensation plan can take the form of
merit pay, bonuses, profit sharing, corporate stock ownership, and commissions.
The reward can be paid currently or deferred to some time in the future,
typically at retirement. An incentive compensation plan can be purely
discretionary and may be targeted to individual employees, work crews, the
organization as a whole, or a combination of these groups.
Irrespective of which approach is chosen, managers and supervisors should
understand what's expected of them to qualify for the incentive compensation.
Contractors should clearly spell out minimum performance standards, even in
situations where the compensation is purely discretionary. Many contracting
firms have found it helpful to link corporate goals to managers' and
supervisors' performance objectives in order to earn incentive compensation.
Indeed, the most successful incentive compensation plans are customized to the
contractor's specific needs and goals.
Performance-based Plan
A performance-based plan employs objective criteria to determine incentive pay.
Generally, the plan gives managers a fixed percentage of profits per division or
contract. Some plans establish clearly identified objectives that the manager
must accomplish in order to receive the compensation. For instance, since punch
lists significantly impact a contractor's bottom line, some contractors award
incentive pay to managers or foremen for minimizing punch lists and/or for
resolving them efficiently.
Discretionary Plans
Contractors value discretionary incentive compensation plans for their
flexibility. For example, it's not always possible to grant incentive pay or to
assess the contributions of top performers solely through a set of objective
criteria. Since these individuals are often put in charge of the most complex
projects, a more subjective analysis of their performance may be warranted. A
pure performance-based plan could end up undervaluing a key employee's overall
contributions, particularly on difficult or unusual projects where certain
skills may be difficult to measure. However, a discretionary plan would allow a
contractor to reward a key employee based on the contractor's own assessment of
the value of the employee's various contributions.
Deciding on Payment
The construction industry has traditionally relied on cash bonuses. However, a
growing number of privately owned firms are offering top performers the
opportunity to receive an equity stake in the business. Typically, ownership
interests come in the form of restricted stock. Under this arrangement, the
employee is granted an equity interest in the company but would forfeit some or
all of the stock if he or she leaves the company prior to a predetermined
vesting schedule.
Other contractors who are less willing to give up any actual ownership in their
firms rely more on "phantom" stock and on stock appreciation rights to reward
key employees. These incentive payment strategies allow recipients to benefit
from and share in any increase in the value of the company stock while not
actually owning any shares.
We Can Help
We can help if you think that your company could benefit from introducing an
incentive compensation plan or if you are dissatisfied with your current plan's
operation.
"Contractors have found that providing compensation 'over and above'
base pay has helped retain and motivate key employees."
Construction workers who were employed on an airport extension project were
required to pass through a security checkpoint on the tarmac and to travel on
authorized, company supplied buses and vans in order to reach their worksite.
The workers argued that they should be compensated for their travel time and the
time they spent going through security. A U.S. Appeals Court rejected their
claim and stated that under the Portal-to-Portal Act, walking, riding, or
traveling to and from the location where the principal activities are performed
(including passing through security checkpoints) is exempt from compensation.
Office Developers Opting for Tilt-Up
Tilt-up construction is being used by a growing number of office developers,
attracted largely by the potential for cost savings over more traditional
construction methods. Long used in constructing warehouses and big-box stores,
tilt-up involves concrete being poured into large frames which are then tilted
up after hardening to form the walls of a building. The Tilt-Up Concrete
Association, the industry's trade group, says that 309 million square feet of
walls were constructed using this approach in the U.S. last year.
COPYRIGHT © 2006 JONES, HENLE & SCHUNCK. ALL RIGHTS RESERVED. PRIVACY POLICY
