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Time For End-of-Year Housecleaning
By Jim Jordan
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Jim Jordan is
director of construction services for Dallas/Fort Worth-based
Weaver and Tidwell LLP.
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Jordan discusses new legislation and other factors that contractors should consider when preparing for year's end and establishing a forecast of business activities.
It's time for contractors to put their tax reporting in order
and lay the groundwork for business activity in 2007. Coloring
such initiatives will be the new margin tax passed earlier
this year by the Texas Legislature and Section 199 of the
federal American Jobs Creation Act of 2004.
Legislation aside, there is always much to do to prepare for
year's end. For calendar-year contractors, it is the last
chance to clean up the books. The process should begin with
a thorough review of all contracts, particularly those related
to change orders.
It is critical that all change orders requested from owners
be signed before Dec. 31. Owners often request changes during
the job, and do not sign them after the additional work has
been completed. If change orders aren't signed, contractors
face the possibility of the owner later saying they no longer
have the money to pay for the changes.
Contractors also need to make certain they have availed themselves
of all possible tax deductions. One that is often overlooked
is that made possible by Section 179 of the tax code, a deduction
relating to the cost of certain qualifying property. Historically,
contractors have purchased equipment and then depreciated
it over its useful life.
Section 179 allows contractors to take the entire deduction
the first year. For contractors who qualify, there's still
time to purchase equipment by the end of this year and claim
the deduction for 2006.
Along with these taxation issues, pay close attention to:
Expense Documentation Writing off expenses for travel, meals
and entertainment is a beneficial deduction. Such expenses
can raise red flags, so it is imperative to keep receipts
in perfect order.
Deferred Compensation Plans By the end of this year, contractors
must show they are in compliance with the new rules on deferred
compensation that went into effect in 2005.
Accounting Methods Before year's end, it is important for
contractors to decide if they are using the accounting method
most advantageous to them.
Employee Benefits Contractors need to review their employee
benefits package.
Many benefits are deductible and inexpensive. For example,
contractors can deduct the cost of some fringe benefits on
which employees will not be taxed.
In addition to standard taxation issues, contractors this
year must also deal with two new laws.
The first, Section 199 of the American Jobs Creation Act,
offers potential savings. It allows contractors this year
to deduct 3 percent of Qualified Production Activities Income.
That percentage goes up to 6 percent for tax years 2007-2009,
and 9 percent for tax years 2010 and thereafter.
Another new law, passed by the Texas Legislature, replaces
the previous franchise tax of 4.5 percent of taxable income
with a 1 percent margin tax based on Texas gross receipts,
less certain deductions. Contractors will be responsible for
a large share of the new tax because so many reorganized as
limited partnerships to escape paying the loophole-riddled
state franchise tax. The first margin tax payment is due in
May 2008. For calendar-year companies, the tax will be computed
by using revenues and costs beginning Jan. 1, 2007. For some
fiscal-year companies, the new rules began to apply June 1
of this year.
Establishing a formal forecast of business activities over
the next 12 months is critical for planning purposes. The
forecast also provides comfort to one's bankers, bonding agents
and other financial partners. These financiers need to know
factors such as how much work a contractor has booked over
the next 12 months, how much cash is available, how much outstanding
debt is on the books and how much equipment needs to be purchased.
Laying out projections before year's end engenders confidence
in financial partners - and simplifies future financial negotiations.
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