QAt what point/size do you recommend a builder
/ contractor use an accountant? Why? Why is a builder-specialist CPA (like those at Large and Gilbert) a good idea to utilize?
A: A contractor doing over $1,000,000 in revenue should strongly consider using a CPA firm that specializes in the construction industry because of the complexity of the tax code and the tax benefits allowed to contractors. If a contractor plans to do business outside of their own home state, they should seek CPA advice immediately. Going into a state and doing business without knowing that state’s tax laws and regulations can create frustration and loss of revenue for the contractor. Additionally, contractors with revenues over $1,000,000 can become overwhelmed by the amount of time and effort required to keep track of job costing, their accounting system, and managing the cash flow of their business.
A good contractor-oriented CPA firm can help the contractor navigate the maze of tax laws and regulations, help with tax planning to reduce income taxes, and assist with cash flow management. The CPA firm can also assist in maximizing bonding and banking potential by giving construction-specific advice and preparing year-end financials, graphs, and trends that the bond company and banker can rely on and that the owner can use to better know how to run the business. Unless a contractor has extensive experience or training in the financial end of the business, he or she will need the advice and assistance of a trusted CPA. Large and Gilbert recommends finding a full-service firm that can offer more than “just tax and accounting advice.” Contractors also need assistance with “retirement planning, asset protection, cash management, breakeven analysis,” and a host of other financial topics. QHow do builders determine what is the best classification
for their business: S-corp, C-corp, or LLC?
A: There is not one right answer to this question and the factors which influence this decision should be analyzed on a contractor by contractor basis. In general, most contractors will set up as either a C-corporation or an S-corporation. The tax codes for each are vastly different.
One of the factors to consider when making this decision is what the owner( s) plan to do with the business as it grows. Will the business be passed on to family members or is the intent to grow the business for a profitable sale?
Another factor is the anticipated profitability of the company. As the contractor’s business grows, it might be beneficial to break up the activities into two parts with one part a C-corporation and one part as an S-corporation. The entity that is designated as the C-corporation can take advantage of the lower corporate tax brackets and benefits in the tax code to increase the overall company equity. The second entity of the company would become an S-corporation to avoid the double taxation of the C-corporation while moving the profits out of the corporation at individual tax rates.
LLC’S are ideal for rental properties such as the contractor’s office building due to the liability protection with the minimal annual cost of proper business record-keeping such as preparing corporate minutes.
QWhat write-offs are commonly unknown or
overlooked by builders? A: It’s important to remember that
these potential tax saving ideas are general in nature and may not be possible for everyone to take advantage of. A good construction CPA can help the contractor navigate the best ideas that are appropriate for their business.
Most contractors will have write-offs for the depreciation on vehicle and equipment purchases, which can be significant. However, contractors are advised to buy only what is necessary for the business and not to make purchases just to get a tax write-off. Contractors should also look at their old accounts receivable to see if there are any that can be written off as bad debts if the company’s tax return is prepared on the accrual method.
An area often overlooked is how the bookkeeper codes expenses. Charitable contributions are one such expense. These contributions are limited at the business and personal levels in the tax code. If the company provides items for a charity or charitable function that involved putting the company’s name on plaques, billboards, banners, etc., it should be coded as a marketing or advertising expense. Properly classified, these items will not be subject to the charitable limitations. It’s important to remember that meals and entertainment are only 50 percent deductible, and tax penalties are not deductible at all. If the bookkeeper mistakenly recorded payments to these expense categories, deductions could be incorrectly reduced.