What Do Looming Tax Law Changes Mean for the Construction Industry?

With many favorable tax laws scheduled to expire at the end of 2012, you may hear your CPA saying things like “accelerate income” or “defer deductions” – exactly the opposite of what you may be accustomed to hearing.  This is because if Congress doesn’t act, tax rates are scheduled to increase with the maximum tax rate set to jump from 35 percent to 39.6 percent.  In addition, there is a new 3.8 percent Medicare surtax on net investment income for certain taxpayers.  So paying tax on income in 2012 will cost fewer tax dollars than it will in 2013.

What Can I Do?

If you are a cash basis taxpayer, call customers who owe you money and ask to be paid.  It sounds simple, but many of us forget to ask our customers to pay us when they fall behind, and sometimes that is all it takes to see results.

Accrual basis taxpayers should make sure they record and mail all possible invoices by year-end.  Besides being a handy tax planning tool, timely invoicing is an important part of good cash flow management.

Taxpayers on the completed contract method of accounting should carefully review their work in process schedule.   This year more than ever, it is important to meet with your CPA to determine which jobs should be closed for tax purposes.  In the past, you may have been inclined to keep jobs open that were close to 95 percent complete to enjoy another year of tax deferral, but doing that this year could cost you an additional 4.6 percent in tax in 2013.

Taxpayers using the percentage of completion method should review their job schedule to confirm their estimates and cost allocations are correct and all approved change orders are included.

The Section 179 Threshold

Taxpayers using any of these methods may want to consider postponing deducting expenses when possible until 2013, with the exception of items qualifying for Section 179 treatment.  The 179 threshold is set to drop from $139,000 to $25,000 in 2013, so timing the purchase of equipment and other fixed assets should be carefully evaluated to maximize tax benefits.

While it is always important to have a year-end planning meeting with your tax professional, this year it is even more critical.  The tax planning you are accustomed to in previous years may not be the best plan of attack for the 2012 tax year.  However, as with any tax plan, you won’t want to make business decisions based solely on tax law, and if you think a tax strategy will negatively impact your business, reconsider – saving tax is never worth jeopardizing your business.

About the Author: Terri Richards is an accounting services manager at Kaufman, Rossin’s Boca Raton, Fla. office, and a QuickBooks ProAdvisor. Kaufman Rossin offers QuickBooks training, accounting and consulting services for a variety of industries, including construction. She can be reached at trichards@kaufmanrossin.com.

Read about this construction article at Construction Today.