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| What You Need To Know About the HIRE Act |
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A recently passed federal law holds out the promise of some financial relief for contractors struggling in the current difficult economy. The Hiring Incentives to Restore Employment (HIRE) Act contains tax incentives designed to encourage businesses to hire and retain unemployed workers.
The incentives include a payroll tax holiday and an income-tax credit for retaining eligible employees. Contractors that hire seasonal workers will likely benefit from the break on payroll taxes. In addition, the new law benefits businesses that buy machinery and equipment in 2010 by retaining the $250,000 expensing limit under Section 179 of the tax code.
Payroll Tax Holiday
The employer portion of the Social Security payroll tax is currently equal to 6.2% of up to $106,800 of wages paid to an employee. The Hire Act exempts employers from paying their share of the Social Security tax on wages paid to qualified individuals from March 19, 2010, through December 31, 2010. The law does not place a limit on the number of qualifying workers an employer can hire.
The tax holiday is available for a newly hired employee who:
+ Is hired (or rehired) after February 3, 2010, and before January 1, 2011.
+ Has not been hired to replace a terminated employee unless the former employee left the employer voluntarily or was terminated for cause.
+ Is not related to the employer (as defined in the law).
+ Has been unemployed for the 60-day period ending on the date employment begins or has worked no more than 40 hours during the same 60-day period.
+ Provides a signed affidavit certifying his or her unemployment status. Employers may use Form W-11, available on the IRS's website (www.irs.gov), for this purpose.
Credit for Retained Workers
In addition to the payroll tax holiday, employers can claim an income-tax credit for retaining qualifying workers for at least 52 consecutive weeks. The credit for each retained employee is (1) $1,000 or (2) 6.2% of wages paid to the employee during the 52-week period, whichever is less. The credit is available only if wages paid to the employee during the last 26 weeks of the 52-week period are at least 80% of wages paid during the first 26 weeks. NOTE: The benefit (credit) will be received upon filing of the 2011 income tax return.
Section 179 Expensing
As noted, the dollar limit on asset purchases eligible for Section 179 expensing will be $250,000 for 2010 as a result of the HIRE Act. The $250,000 deduction maximum is reduced to the extent the cost of qualifying property placed in service during the taxable year is greater than $800,000. The Section 179 expensing election is available for most non-real-estate assets.
We would be happy to help you determine if your firm can benefit from any provision of the HIRE Act.
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| Insurance for Contractors |
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Construction is a difficult and unpredictable business. Contractors know that there are some things they can do little about -- the weather, for example. But they also know that they can take certain measures to prevent issues such as theft, damage, subcontractor defaults, or work site injuries from having serious financial consequences for their business. The most effective tool they use to minimize the impact of potentially costly events is insurance.
Knowing what types of insurance are available and which may be needed specifically for your business is critically important. Some owners and governmental entities will insist that your firm have certain types of insurance in place before they'll consider a bid. The following overview of the different types of insurance available to contractors may help you determine the overall approach that is most appropriate for your business.
Surety Bonding
A surety bond is an agreement that binds you, the contractor, to comply with the terms and conditions of a contract. It typically deals with the performance of some or all stages of a construction project. In situations where your firm can't successfully meet the terms of the contract, the surety assumes your financial responsibilities until the project is completed. You may find it impossible to obtain work on certain projects without first obtaining surety bonding.
General Liability Insurance
Lawsuits are a fact of life for businesses. Losing a lawsuit or agreeing to a settlement can be extremely expensive. General liability insurance protects your business assets in case your business is sued for something it did (or did not do) that caused a personal injury or property damage. Commonly, an accident or mistake may have occurred. Liability insurance may cover a variety of claims, including bodily injury, property damage, personal injury, and even damage from slander or false advertising.
Workers' Compensation Insurance
Businesses are generally required to carry workers' compensation coverage. Workers' compensation insurance protects you from worker lawsuits that result from injury related accidents on the job and may provide various benefits, including medical treatment and compensation for your injured employees' lost income. If covered, employees receive workers' compensation payments irrespective of who was at fault for the accident. If you have projects in more than one state, you should be aware that workers' compensation laws vary from state to state.
Builder's Risk Insurance
Builder's risk insurance is intended to provide protection for construction projects under way. In addition, it generally covers any theft of or damage to materials used in a project, such as plumbing, lighting fixtures, electrical equipment, or appliances.
Pollution Liability Insurance
Trade, general, and specialty contractors must factor in the possibility of an accidental release of fuel oil, gases, or chemicals from ruptured pipelines and fuel tanks on a project. Were that to happen on one of your projects, it's possible that your business could be held liable and face substantial financial losses. Pollution liability insurance provides protection for contractors for a wide range of pollution risks. In addition, policies may provide insurance for third-party claims for bodily injury and property damage as well as for remediation costs that stem from pollution incidents.
Key Person Insurance
What would happen to your business if you, a partner, or another key employee were to die? Key person life insurance is designed to protect your business in such a scenario. If you operate your business with multiple partners, you should consider using life insurance to fund a buy-sell agreement. Disability insurance for you and your key people should also be a priority.
Property Insurance
Basic property insurance typically protects the physical assets of your business, such as buildings, inventory, furniture, documents, machinery, and similar items.
Wrap-up Insurance
Wrap-up insurance plans consolidate insurance coverage for general contractors and subcontractors who are working on a single project. It's purchased and managed by a single sponsor, either the owner or the general contractor. A wrap-up policy typically extends to workers' compensation, general liability, excess liability, builder's risk, and pollution liability insurance.
Umbrella Insurance
A business can use so-called umbrella coverage to protect itself from a major catastrophe or lawsuit. Umbrella insurance provides coverage in amounts in excess of the difference between your underlying general liability coverage and the amount awarded or settled upon up to the policy's limit resulting from a lawsuit or other claim.
Call Us
Take the time to review your firm's insurance coverage so you can identify any gaps that may exist. If we can help with your review, please call us.
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| Developments in Tax and Business |
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Targeting Future Homebuyers
Researchers cite women, baby boomers, and immigrants as the demographic groups most likely to drive future demand for housing. Women are the fastest growing buyer segment, while baby boomers are downsizing and seeking out smaller and less labor-intensive properties.
EPA Extends Storm Water Construction General Permit
The Environmental Protection Agency (EPA) has extended by one year, to June 30, 2011, its 2008 storm water Construction General Permit (CGP). The 2008 CGP regulates the discharge of storm water from construction sites that disturb one acre or more of land and from smaller sites that are part of a larger development. The agency wants the extension to incorporate the new national Construction and Development Effluent Limitations Guidelines requirements into the CGP.
IRS Audits
The audit rate for all corporate returns other than Form 1120S was 1.3% for the 2009 fiscal year, according to the IRS. For partnership and S corporation returns, the rate was .4%. The IRS audited 1,425,888 individual income-tax returns in 2009. However, the majority of those audits (77.1%) were correspondence audits. |
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| Avoid Profit Fade with Smarter Estimating |
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Like most contractors, you've probably worked one or more projects that continued to incur unanticipated additional costs even though the projects were close to completion. And more often than not, you may have ended up with a much smaller profit margin than you originally projected when you first put in a bid. Known as "profit fade," this occurrence often results from weak estimating processes.
Here are some suggestions that can help strengthen your estimating procedures so that the profit you ultimately earn on a project will be very close to your original estimate.
Analyze Past Projects: As a first step, look closely at past performance. Choose several projects that were highly profitable and others that weren't. Compare each project's estimated costs to the final figures. Analyze the major assumptions that were used in preparing the estimates to see if the assumptions were reasonable.
Study the Design Specs: When preparing an estimate, review the design specs several times so that you can figure out with as much accuracy as possible the quantities of material required on each job.
Review Wage Rates: Double-check your estimates on wage rates for each job. Be sure that the rates have been updated to reflect any changes in wage scale or in union rates. At the start of a job, make sure the project manager is aware of the labor costs that were incorporated in the bid.
Stay Within Profit Targets: Consider whether your company should have a written policy that states the minimum amount of profit you are willing to accept on every job. Don't bid on a job if that minimum can't be achieved.
Update for Contract Modifications: Every time an owner or architect changes a contract specification, review and revise your estimates. It's one of the most effective ways to protect your business against profit fade.
Follow Up on Completed Projects: Compare your estimates to your final cost reports. If there are significant differences, you'll need to go back and find answers. Once you've identified what accounts for the differences, you can develop procedures to prevent a reoccurrence.
Accurate estimating is absolutely critical to profitability. You should regularly review and reassess your estimating processes to help ensure that your profit margins remain solid.
"Compare each project's estimated costs to the final figures."
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| For more information, email jhscpa@jhs.com. | | back to top |
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| Is It Time To Boost Your Bonding Capacity? |
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Given how weak the construction industry is currently, adding bonding capacity may not appear to be a priority for your company right now. However, taking on additional bonding capacity makes sense for several reasons. First, it sends a signal to owners that your firm is in solid financial shape. Owners want to work with contractors they can be assured will be there for the duration of their projects. Second, additional bonding helps when it comes to lining up the best subcontractors to work on your projects since subcontractors want to work with financially strong contractors. Finally, securing additional bonding positions your company to take on a wider variety of projects -- as well as those with a higher dollar value.
However, before your surety will issue additional bonding to your company, it's going to ask you to supply significant documentation detailing the firm's financial health. As a part of the evaluation process, the surety will ask to see your financial statements, appropriate interim and annual schedules, and schedules of contracts in progress, contracts completed, backlog, and disclosures about the extent to which contract billings are used as bonding collateral.
Provide Timely Statements
Respond to your surety's requests for financial information as quickly as possible. Better still, be proactive and make your financial statements available to your surety on a regular basis.
Review Your Accounts Receivable
Your surety may be alarmed by any large variation in the level of accounts receivable. You'll need to take steps to institute a prudent collection policy if you want to keep this from happening. Review older receivables regularly and establish workout arrangements with customers that are slow to pay.
Focus on Cost Accounting
Your surety wants to feel comfortable about how you estimate and manage job costs. That's why you should expect your surety to carefully review your estimated and actual gross profit on a job-by-job basis. Your goal should be to minimize "profit fades" -- the decline in profit margin from the time a contract begins to the time it is completed. Of course, you'll want to be certain that your accounting systems are functioning properly before you give your surety financial information.
You'll find it easier to manage estimated profits on your existing jobs if job cost information is up to date. So make certain that you update the labor and material costs you incur on projects on a weekly or bimonthly basis. Your accounting controls should be in place so that accounts payable and payroll costs are reported properly.
Reveal Transactions Between Related Parties
Your financial statements should disclose any related-party transactions. It's important that you are up front about detailing the nature and terms of any agreements between persons with potential conflicts of interest.
Be Prepared To Detail Personal Finances
The surety is likely to request information about your personal finances. If you invest in real estate, you may need to disclose to the surety the related financing arrangements, cash flow, occupancy rates, and lease information. In addition, you should inform the surety of any personal guarantees on loans. Your surety also may want to review your insurance coverage -- especially life insurance. Life insurance cash surrender value can enhance your company’s adjusted working capital, which is an important factor analyzed by sureties. Because the surety is depending on your actions in the future, inadequate personal insurance can limit the company's bonding capacity.
Whatever the outcome of an attempt to secure additional bonding, the fact that you are paying closer attention to your financial statements also provides you with information that is valuable for the effective management of your construction operations.
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| For more information, email jhscpa@jhs.com. | | back to top |
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| Developments in Tax and Business |
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Safe Harbor Rules for Deposit of Employee Plan Contributions
The federal Department of Labor recently issued a final "safe harbor" deposit deadline for 401(k) plans, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs and Salary Reduction Simplified Employee Pension Plans (SEPs) with fewer than 100 participants at the beginning of the plan year. The regulations state that participant contributions and loan repayments will be treated as made in a timely manner if the amounts are deposited with the plan no later than the 7th business day following the date the amount was received by the employer. In the case of wages withheld, it’s the 7th business day following the date the amount would have been payable to the participant in cash.
"Green" Building Risks Concern Owners and Contractors
Many construction industry participants believe that there are certain potential risks associated with green-built and LEED-certified projects but are unsure how best to manage these risks, according to a report issued in 2009 by Marsh Inc. The report notes that owners, contractors, and design firm executives involved in green design and construction are most concerned about financial risks, including the impact of green design, construction, and ownership on profitability, cost, and their ability to complete projects on time and within budget. |
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| Business Standard Mileage Rates for 2010 |
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The IRS has set the optional 2010 standard mileage rate at 50 cents per mile for owned or leased autos (including vans, pickups, and panel trucks) for business travel. That's a 5 cent decline from the 55 cent rate that was in effect for 2009. The IRS says that the decline reflects the generally lower transportation costs compared to 2009.
The standard mileage rate is used to calculate the deduction for business use of a car. The deduction, which is calculated by multiplying the number of business miles driven by the appropriate rate, covers expenses related to the cost of owning a vehicle (e.g., depreciation) as well as operating costs such as maintenance, repairs, insurance, and gas. Parking fees and tolls connected to business driving, though, can still be claimed as separate deductions. Taxpayers can opt out of using the standard mileage rate and instead deduct their actual expenses.
The Standard Mileage Rate Has Advantages
The standard mileage rate offers taxpayers several advantages. For example, the taxpayer doesn't have to keep a record of actual expenses or save receipts. Instead, the only requirement is that the taxpayer maintains a record of the time, place, business purpose, and number of miles traveled. In addition, if auto expenses are deducted via the mileage rate, the auto is not subject to the tax code's depreciation dollar caps or the special rules that apply if qualified business use does not exceed 50% of total use.
Beginning January 1, 2010, the standard mileage rate for the use of an automobile in connection with a move that qualifies for the moving expense deduction is 16.5 cents per mile, 7.5 cents lower than the rate for 2009. The mileage rate for driving a car for charitable purposes remains unchanged for 2010 at 14 cents per mile. This rate is set by law and is not adjusted for inflation.
"The standard mileage rate is used to calculate the deduction for business use of a car."
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| For more information, email jhscpa@jhs.com. | | back to top |
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DANVILLE
(925) 820-1821
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SACRAMENTO
(916) 568-5556 |
ORANGE
(714) 978-1800 |
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