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.

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.

New tax laws

CRITICAL NEWS ON Research and Development matters courtesy of RMS Clattery:

Congress passed H.R. 6111 on Friday, December 9, 2006, which provided a seamless extension of the R&D tax credit until the end of 2007.  President Bush is expected to sign the bill into law. I thought you might like to review the highlights of this bill.  No real changes are taking place until 2007; however we have seen many qualified businesses not taking the credit during the last year because it was not officially extended.   

The R&D tax credit equals 13% of qualified expenses over a base amount.  The base amount is calculated from 1984 to 1988 information if the business incurred qualified expenses and gross receipts during that time period.  Taxpayers that were not in existence during the 1984 to 1988 time period follow the start up company rules. 

Alternatively, a taxpayer may calculate the R&D tax credit using the alternative incremental credit (AC) method.  A taxpayer receives a credit as long as its qualified expenses exceed one percent of gross receipts.  H.R. 6111 provided for an increase in alternative incremental credit (AC) percentages beginning in 2007:

·         3% (increase from 2.65%) of qualified research expenses greater than 1% and less than 1.5% of average annual gross receipts;

·         4% (increase from 3.2%) of qualified research expenses greater than 1.5% and less than 2% of average annual gross receipts;

·         5% (increase from 3.75%) of qualified research expenses exceeding 2% of average annual gross receipts.

The legislation created a new calculation method, the Alternative Simplified Credit, beginning in 2007:

·         Credit equals 12% of qualified research expenses that exceed 50% of the average qualified research expenses for the three preceding years.

·         If the taxpayer does not have qualifying expenses in all three preceding tax years, the credit is 6% of the current year qualified research expenses. 

Note: Our fees for R&D tax credit projects may also be eligible for a grant program through the Department of Commerce.  The grants allow companies to hire external consultants to improve the company’s business.  The maximum project amount is $150,000 and the grant covers 50% or $75,000.  A company must show a decline in sales and/or employment over the last several years because of foreign competition to qualify.  We would be willing to work with your clients to determine if the grant is feasible and proceed accordingly.  These grants are not exclusive of R&D Credits – business improvement in general to help offset unfair foreign competition. 

I send these updates on changes to tax and/or accounting regulations- if you do not wish to be bothered by these emails please email back to me and I will remove you from my list.

Happy Holidays

Year end planning

e aliWith the end of the year clearly in our tax "gun sights" I would be a good time to remember of the tax laws that were amended or modified in the last few years. AMT Exemptions, Capital Gains, Dividends, Marginal Income Tax, IRA Contribution, and Estate Tax rates have been impacted by recent tax changes....so in preparing for the feds it would be a good time to get with your tax advisors to make sure you are taking advantage of all available tax opportunities.

New IRS valuation issues

With the new changes to FAS 123(R) stock bonuses and buy-sell agreements....in fact any stock plan of any sort will substantially impacted any company. Now the company must determine the "Fair Value" of these plans. Another piece of legislation adopted as a result of the Enron, et al., scandals? From what I can read one must determine whether or not an outside financial adviser must be hired to justify certain financial treatment of employee shareholder stock compensation. At another level this makes sense to protect the business owner and give the employees the best information available. But at what point do we determine the micro-management of everything to do with financial aspects of a closely held businesses is not cost effective in light of the burden placed on such companies? This act seemingly requires all closely held company to pay for the excesses of large publicly traded companies that are no longer in business? Most legal experts in the area have always held that the laws prohibiting the abuses of the last six years existed before Sarbanes-Oxley was adopted....if only the laws had been enforced. Now we have gone to the other extreme...."majoring in minor things"....in all aspects of the family held business? What is the correct amount of regulation?

Tax Credits and Incentives

It always appeared to me that every general contractor should know about every tax incentive available to their potential customer and to use the same as a marketing device. Here in KC we have TIF (Tax Incremental Financing) plans and Star Bonds most notably used as a vehicle to motivate development and construction.

A recent article in CFMA also points out that Empowerment Zones will create employment tax credits for applicant companies. Unfortunately the magazine does not the KC area as being available for this benefit. I believe this to be wrong, as one client has obtained this benefit in Kansas.

Other interesting alternatives....The Work Opportunity Tax Credit Program encourages employers to hire job seeks from groups that are inhibited from joining the work force. such as those who are food stamp recipients, or receive public assistance, high risk youths, SSI recipient, certain felons, etc..

In this era of tight employment market it is time to examine these alternatives!

Tax incentives

If you have the interest, take the time and dial in to the CBIZ State and Local Incentives webinar scheduled for Thursday, August 31, 2006. Why? I am constantly amazed by the amount of incentives available to businesses...anything from refund on insurance premiums to tax credits for new equipment are available.........along training and capital investment credits.

Kansas and Missouri are trying to keep good businesses around here and to "incentivize" the good ones to grow....register for it at jgray@cbiz.com!

409A

Remember the looming deadline for bringing your defined benefit plan into alignment with Rule 409A of the Internal Revenue Code....oh ja, the IRS has not fully disclosed how to go about doing this as the information needed to be provided by the IRS ..... has not been created. If a company does not comply....you guessed it....penalties and interest!

With the December 2006 deadline looming get with your employee benefits attorney to determine how to comply.....Greg Ash of our office who handles these sort of matters tells me everyone should get on it....'cuz if you call in December, it ain't gonna get done easily.............

Tax matters

A recent mandate from the IRS concerning IRC Sec. 199 (Domestic Production Activities Deduction [DPAD]) is attached...THANKS, CFMA!

IRS & Treasury Issue
Regulations on IRC §199

PRINCETON, NJ – The IRS and Treasury released final regulations regarding the IRC §199 Domestic Production Activities Deduction (DPAD). The new guidance specifies rules for the deduction for income attributable to domestic production activities.

The regulations contain a reverse de minimis rule for taxpayers who have a small amount of domestic production gross receipts (DPGR). The guidance classifies grading, demolition, clearing, and excavating as construction activities for DPAD purposes when the services are performed in connection with building or substantial renovation activities. The regulations also clarify the methods of determining W-2 wages for IRC §199.

In addition, the new rules replace previous guidance that excluded the sale of materials incorporated into real property from the §199 deduction. CFMA, among other organizations, objected to this rule and other aspects of the temporary regulations in a comment letter issued in December 2005. The new rules clarify that materials consumed during construction or that become structural components of a building will qualify.

The new guidance will simplify calculation of the deduction for contractors nationwide. Eric P. Wallace, who drafted CFMA’s comments said, “The final regulations allow more contractors to take advantage of the new deduction with fewer prohibitive administration costs or concerns about qualification.”

Tax Reform

Stay tuned, kids! Congress is in session and is examining the possibility of reforming the estate tax. Better get in touch with your Congressman and vote your conscience on this issue....but first call you friendly attorney or CPA to get all the facts.....as there are many different sides and many different parties putting their two cents worth into the situation................................