Dec 17, 2020
The ongoing pandemic environment has wreaked economic havoc, impacting every sector, some more dramatically than others. From project delays and cancellations to increased competition as a result of stimulus funding (PPP), the construction industry has experienced its fair share of COVID-related issues. Still, for many contractors, the impact will not be fully felt until well into 2021, when backlogs begin to dwindle. According to the Associated Builders and Contractors’ (ABC) Construction Backlog Indicator fell to 7.5 months in September, a decline of 0.5 months from August’s reading. This backlog report is 1.5 months lower than in September 2019.
Those who proactively adjust their business practices will be the ones who survive this unforeseen disruption. Here are some strategic opportunities to improve your backlog to remain competitive and emerge stronger post-pandemic.
Since the start of the pandemic, there has been a significant decline in retail and restaurant-related projects and an increase in healthcare contracts. Contractors who have padded their backlogs with retail and restaurant work may be facing considerable losses during the slowdown. The more a construction firm diversifies its project types, the better equipped it will be to weather a disruption. Diversifying can mean taking on multiple construction project types, like public or private jobs or branching out into service work, or picking up a new trade or skill to add your construction repertoire. If you find your company has gotten into a rut when it comes to the type of projects you are doing, now is the time to consider expanding your focus. Whether it is public/private, residential/commercial, or a different industry or building type, diversification is the key to protecting the health of your backlog.
It may seem counterintuitive, but during uncertain times being strategic and selective about the work you take on may be the leg up you need. Increasing profitability should be top of mind rather than padding your backlog for volume. Taking on new work for the sake of volume could be detrimental as it only takes one bad project to damage your organization and its reputation. More importantly, strategic business planning should look at 30/60/90 days rather than the typical 2-5 year plan. Scenario planning will also help you be flexible should another disrupting event occur.
Hand-in-hand with strategic a mindset is looking for ways to reduce waste and become more efficient. Reviewing your current processes and looking for methods to slim down your operations will save capital in the long-run. Technology can be a great means to enhance efficiency and provide a clear picture of your costs. Business intelligence solutions like Microsoft PowerBi are providing contractors with an in-depth look at key metrics with the ability to customize reports and spot anomalies as they arise. Harnessing the power of data allows for better business decision making.
Labor shortages have consistently plagued the industry and now more than ever, retaining your current talent is crucial. While the construction sector was deemed essential at the onset of the pandemic, the health and safety of workers was a concern. According to the Associated General Contractors of America’s 2020 Workforce Survey Analysis found the pandemic “contributed to conditions that make it difficult for a majority of firms to find craft workers.” Continuing to invest in the wellbeing of your current workforce and demonstrating their value will help attract and ultimately retain employees. Finally, assessing your leadership to ensure you have the right people in key positions will aid in your ability to source new projects.
Leveraging your top clients can be a differentiator. After all, they know the quality of work you do and can speak to their satisfaction. Investing the time to revisit your clients and understand their current needs may prove to be more fruitful in securing new work.
As 2020 comes to a close and we look into the future, now is the time to proactively adjust your business strategies to emerge stronger post-pandemic. Those who take steps now will gain a competitive edge in today’s rapidly evolving climate. Our William Vaughan Company Construction team can provide guidance and offer value-added recommendations on this very topic.
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Ryan Leininger, CPA
Construction Practice Leader
Categories: Construction & Real Estate
Oct 23, 2014
You probably have encountered section 179 and the accelerated depreciation benefits it provides. However, we have found the familiarity with section 179D to be greatly limited. This is discouraging considering the substantial benefits it can provide to those in the construction industry. Let’s take a brief look at 179D and highlight its advantages.
What is Section 179D? It is a provision for energy efficient commercial buildings built or upgraded with energy efficient improvements after 12/31/2005. The maximum deduction available is $1.80 per square foot and acts as an accelerated depreciation deduction. The calculation for the deduction (up to the maximum) is based upon the interior lighting, HVAC, building envelope costs and efficiencies. This is certainly a nice benefit for building owners. However, the greatest tax savings are obtained by those in the construction industry, including engineers and architects.
Permanent tax benefit As I eluded to earlier, the 179D deduction is inherently an acceleration of depreciation. Nevertheless, this deduction becomes more than an accelerated deduction for those in the construction industry. Why? The IRS realizes that governmental entities cannot benefit from this deduction due to their tax-exempt status and allows them to allocate (essentially transfer) the deduction to the responsible party for designing the property. This means that this deduction is a permanent benefit (once transferred) that would not otherwise be attainable by the designer. It is a method that reduces the tax burden on each governmental project and increases the after tax earnings for those firms that choose to take advantage of this opportunity.
Please contact your William Vaughan Company representative for further information and for guidance on the facilitation of this deduction.
By: Nate Bernath, C
Categories: Construction & Real Estate
Mar 20, 2014
In an effort to help collect more of the taxes owed to Uncle Sam, the IRS is providing information to educate the construction industry. “Contractors, subcontractors, as well as individual workers need to be aware of everything that counts as income and proper accounting methods so they pay their fair share of taxes,” the tax agency stated in a Fact Sheet. “They also need to be aware of all deductible expenses so they don’t overpay their taxes.”
The IRS continues to zero in on what it calls the “tax gap” — the amount between the taxes that are voluntarily paid and the amount the tax agency believes is actually due.
To this end, the IRS has issued a series of documents to provide better understanding of the tax code. One example is specifically directed at the construction industry.
The tax agency emphasizes instances where taxpayers failed to report, or under-reported, income from construction activities. This applies to individual workers as well as contractors and subcontractors. Following are the highlights:
Generally, income and expenses are based on either the cash method or the accrual method of accounting. “Either method must clearly reflect a consistent treatment of income and expenses from year to year,” the IRS notes.
Many construction businesses use two different tax accounting methods: one for long-term contracts and an overall method for all other items, which is often the accrual method.
1. Accrual accounting: This method requires reporting income in the year earned and expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.
Two commonly-used accrual methods are used in the construction industry:
- Under the “completed contract method,” all income and expenses from a contract are reported when the project is completed and accepted by the customer.
- With the “percentage of completion method,” income is reported proportionate to the costs incurred to date as compared to total estimated costs for the contract.
2. Cash accounting: As the name implies, cash receipts are reported as income when received and expenses are reported when paid. For this purpose, “receipt” occurs when a contractor has unrestricted access to income. Contractors who are able to receive money in one year, but chose to defer receipt, must include the cash as income in the earlier year.
Note that a C corporation, or a partnership with a C corporation as a partner with average annual gross receipts exceeding $5 million, may not be allowed to use the cash accounting method.
It is well-established that a construction business can deduct its “ordinary and necessary” business expenses. An “ordinary” expense is one that is common and accepted in the construction business. A “necessary” expense is one that is helpful and appropriate for the construction business. Note: The expense does not have to be indispensable to be considered necessary.
Several common business expenses that may be deducted in the year they are incurred are:
- Car and truck expenses;
- Employee salaries;
- Trade association dues;
- Rent expense;
- Continuing education;
- Small tools expected to last one year or less;
- Steel toe work boots; and
- Business licenses.
On the other hand, expenses for business assets that are expected to last more than a year must be capitalized and depreciated over their useful lives. Some examples of these assets include:
- Cement mixers;
- Other heavy machinery; and
- Buildings and real property.
Be aware that personal expenses such as clothing that can be worn off the job site, fines and penalties, and the non-business use of vehicles or computers, can’t be deducted. Other expenses, including certain meal and entertainment expenses, may be deductible in part or only if certain conditions are met.
Reminder: The burden is on you to comply with the prevailing tax laws and regulations. If you have any questions regarding your responsibilities, consult with your tax adviser.
Categories: Construction & Real Estate
Aug 27, 2013
The IRS is reminding truckers and other owners of heavy highway vehicles that their next federal highway use tax return, usually due August 31, will instead be due on September 3, 2013. This year’s September 3 due date, pushed back three days because the normal August 31 deadline falls on a Saturday, generally applies to IRS Form 2290 and the accompanying tax payment for the tax year that begins on July 1, 2013, and ends on June 30, 2014. Returns must be filed and tax payments made by September 3 for vehicles first used on the road during July. For vehicles first used after July, the deadline is the last day of the month following the month of first use.Some taxpayers have the option of filing Form 2290 on paper. However, the IRS is encouraging taxpayers to file (and pay any tax due) electronically. If you have 25 or more vehicles, you must e-file. In general, the highway use tax applies to trucks, truck tractors and buses with a gross taxable weight of 55,000 pounds or more. Ordinarily, vans, pick-ups and panel trucks are not taxable because they fall below the 55,000-pound threshold. The tax of up to $550 per vehicle is based on weight. Keep in mind that a variety of special rules apply to some vehicles, such as those with minimal road use.
If you have questions about filing this form, or whether you fall under the special rules, contact your tax adviser ASAP.
Categories: Construction & Real Estate