New IRS regulations....impacting contractors

Some new rules for successful contractors who make charitable gifts from your friends at the IRS. Check out the gift reporting information and also the standards for setting up  private foundations. As to the later more and more clients are establishing the private foundations as vehicles in estate planning matters:

IRS Releases Publications on Gift Substantiation, Public Charities and Private Foundations

Treasury has published three helpful guides for both charities and donors. Many changes implemented in the Pension Protection Act of 2006 (PPA 2006) impacted both donors and charitable organizations. These guides are now updated with hundreds of PPA 2006 changes.

The updated guides are Publication 1771, Charitable Contributions-Substantiation and Disclosure Requirements, Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities, and Publication 4221-PF, Compliance Guide for 501(c)(3) Private Foundations.

Publication 1771, Charitable Contributions-Substantiation and Disclosure Requirements, outlines procedures for gift reporting and substantiation. Donors must have a bank record or written communication from a charity for any monetary contribution, or a receipt from a charity for any single contribution of $250 or more. Payroll deductions may be documented with a pay stub or employer document. For "quid pro quo" gifts over $75, charities must provide a description and good faith estimate of the value of goods or services given to the donor in return for the charitable contribution.

Publication 4221-PC,Compliance Guide for 501(c)(3) Public Charities, covers (i) Activities that may jeopardize a charity's exempt status, (ii) Federal information returns, tax returns or notices that must be filed, (iii) Recordkeeping -- why, what, when, (iv) Changes to be reported to the IRS, (v) Required public disclosures and (vi) Resources for public charities.

One important change for small charities is the requirement to file Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ. This applies for tax periods beginning after December 31, 2006, if that organization is not required to file Form 990 (or Form 990-EZ) because its gross receipts are normally $25,000 or less. Form 990-N is due by the 15th day of the fifth month after the close of your tax period. For example, if your organization's tax period ends on December 31, 2007, the Form 990-N is due May 15, 2008.

Publication 4221-PF, Compliance Guide for 501(c)(3) Private Foundations, covers (i) Types of private foundations, (ii) Activities that may jeopardize a foundation's exempt status, (iii) Federal information and tax returns that must be filed, (iv) Recordkeeping - why, what, when, (v) Changes to be reported to the IRS, (vi) Required public disclosures and (vii) Resources for private foundations.

Economy is still good for construction?

Economist says commercial construction continues to grow nationally

St. Louis Business Journal - by Chris Moon Wichita Business Journal

A national construction expert says commercial construction continues to thrive despite turmoil among home builders.

Ken Simonson, chief economist for the Associated General Contractors of America, said Friday that recent employment data from the U.S. Bureau of Labor and Statistics show jobs in heavy construction trades actually have grown during the past year.

"Nonresidential construction is still boosting the economy, despite the home-building meltdown," Simonson said in a statement.

BLS data indicates overall construction employment nationally dropped by 14,000 in September and is 1.5 percent lower than levels a year ago. But those same figures show jobs in nonresidential building, specialty trades and heavy and civil engineering have grown by 42,000 jobs, or 1 percent, during the past year.

Simonson says in the future, he expects a reduction in office, retail and hotel construction but additional work in the energy, power and hospital sectors.

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What are the hot areas for commercial construction in the future?

During our recent teleseminar (review our September teleseminar archived at www.midwestconstructionlaw.com) our resident economist Dr. Chris Kuehl of Armada Intelligence has indicated Midwestern commercial contractors should stay focused on the following industry sectors for the foreseeable future:

1. Health care and extended stay care;

2. Entertainment and hospitality;

3. Infrastructure and bridge improvement, repair and replacement; and

4. Manufacturing (in part due to the relative cheap labor force in the KC area)!

We will also see growth in oil and gas infrastructure, specifically the construction of oil refineries in various areas of the country.

The Construction Industry and the Tax Gap

Well the IRS is looking closer at issues with contractors under reporting business income (note I said under reporting and not the opposite....not reporting at all). Proper accounting mandates that contractors pay their fair share of tax obligations.

To help contractors with this approach Midwest Construction Law.com will be conducting a teleseminar to deal with these issues. In the interim you might want to review these points:

FS-2007-22, August 2007 Not reporting or under-reporting business income, including income from construction activities, contributes to the tax gap. 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. They also need to be aware of all deductible expenses so they don’t overpay their taxes. This fact sheet is the 15th in a series to help reduce the tax gap by helping taxpayers better understand the tax code. The tax gap is the difference between the amount of taxes that should be paid in a given year and the amount actually paid voluntarily and in a timely way. Income Contractors, subcontractors, and workers must pay taxes on income received for all work, including side jobs and work that is paid for with cash. This includes work in exchange for credit on a bill. It also includes work that is done in exchange for goods or services in a barter exchange. You are required to report your income even if a Form 1099 or a W-2 is not issued to you. Income and expenses are reported on tax returns based on one of two accounting methods, which include either the cash method or the accrual method. Either method must clearly reflect a consistent treatment of income and expenses from year to year. Most construction businesses use two different tax accounting methods, one for long-term contracts and one overall method for everything else, which is often the accrual method. A special section of the IRS web site can help companies pick the best accounting method for their needs. Accrual Accounting The accrual 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.  If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Common accrual methods used in the construction industry are the “completed contract method” and the “percentage of completion method.” Under the completed contract method, all income and expenses from the contract are reported in the year the project is completed and accepted by the customer.  Under the percentage of completion method, income is reported in proportion to the percentage of costs incurred to date when compared to total estimated costs for the contract. Cash Accounting The cash method requires reporting cash receipts as income when received and expenses when paid.  Again, if you use the cash method for reporting your expenses, you must use the cash method for reporting your income. Receipt of income occurs when a contractor has unrestricted access to income, including income earned.  Contractors who could have received money in one year, but chose not to receive the money until a later year, must include the money as income in the first year, as if it had been actually received in that year. Two types of businesses are not permitted to use the cash method of accounting.  These include a corporation and/or a partnership with a C corporation as a partner with average annual gross receipts exceeding $5 million, and a business with substantial purchases of materials, generally 10 to 15 percent of its gross income. Additional information on income and accounting methods is available in Publication 538, Accounting Periods and Methods. Expenses Ordinary and necessary business expenses are deductible.  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.  An expense does not have to be indispensable to be considered necessary. Common business expenses deductible in the year incurred include: Utilities Car and truck expenses Advertising Employee salaries Trade association dues Rent expense Supplies Continuing education Small tools expected to last one year or less Steel toe work boots Business licenses Expenses for business assets that are expected to last more than a year must be capitalized and depreciated over their useful lives.  Examples of assets include: Cement mixer Compressor Ladder Other heavy machinery Buildings and real property Personal expenses including clothing that can be worn off the job site, fines and penalties, and the non-business use of vehicles or computers cannot be deducted. Other expenses including certain meal and entertainment expenses may be deductible in part or only if certain conditions are met.  Additional information about other expenses is available in Publication 535, Business Expenses; Publication 463, Travel, Entertainment, Gift and Car Expenses; Publication 946, How to Depreciate Property; Publication 334, Tax Guide for Small Business, and Publication 587, Business Use of Your Home.  And, further industry information is available in the Construction Industry - Federal Taxation Curriculum.