United States

The time has arrived: Finish tax planning for 2017 and prep for 2018

INSIGHT ARTICLE  | 

The end of 2017 is here, which means it’s time for contractors to not only put their end-of-year financial reporting in order, but also lay the groundwork for business activity next year.

Some items to consider as this year comes to a close:

Fixed assets

Generally, if an asset is purchased with a useful life of more than a year, you must depreciate the cost over a period of years. In most cases, the asset will be depreciated for tax purposes over a given life under a modified accelerated cost recovery system. There are a couple of factors that will accelerate the depreciation in the first year.

Taxpayers are entitled to deduct 50 percent of the costs of qualifying property placed in service during 2017. In addition, taxpayers can expense up to $510,000 of costs of qualifying property placed in service during 2017.

Taxpayers should also consider the provisions in the final IRS regulations regarding tangible property that distinguish between deductible repairs and capitalized improvements, including the safe harbors for small businesses and routine maintenance.

Manufacturing deductions

The domestic manufacturing deduction, also known as the Section 199 deduction or domestic production activities deduction, can be advantageous. Construction of real property in the US generally qualifies for this deduction, which is limited to 9 percent of the lesser of qualified production activities income or taxable income, and not to exceed 50 percent of W-2 wages paid by the taxpayer allocable to domestic production gross receipts.

Credits

Taxpayers also should consider tax credits. Under the Protecting Americans from Tax Hikes Act, some credits were made permanent. Contractors should consider the research and development tax credit if they engage in engineering design activities and bear financial risk and the work opportunity tax credit if they hire employees from several targeted groups.

Along with these taxation issues, contractors also need to review:

  • Expense documentation: Writing off expenses for travel, meals and entertainment is a time-honored and beneficial deduction. However, these expenses raise red flags for auditors, so it is imperative that contractors keep well-organized receipts.
  • Deferred compensation plans: By the end of this year, contractors must show they are in compliance with rules on deferred compensation. If contractors cannot show they are in compliance, penalties can be applied to both employer and employee.
  • Accounting methods: Depending on a contracting company’s size, multiple accounting methods are available. Before year’s end, contractors should know whether or not they are using the method that is most advantageous for them. 
  • Employee benefits: Contractors should review their employee benefits package with their accountants and human resources specialists. Many benefits are deductible and inexpensive. For example, contractors can deduct the cost of some fringe benefits on which employees will not be taxed, such as employer-provided childcare services.
  • 179D deduction: If a contractor designs or constructs energy-efficient government buildings, he or she may be eligible to take this deduction. It is equal to up to $1.80 per square foot of the building, depending on energy savings. The purpose of the deduction is primarily to benefit the owner of the building, but since the deduction does not benefit governmental entities, the law allows them to pass the deduction on to the primary designer. In order to qualify for this deduction, the building must have been placed in service by December 31, 2016.

Before the year’s end, contractors also need to make certain they understand―and are in compliance with―any changes in state tax laws. Because the fine print in any tax law is difficult to understand, contractors should seek guidance from outside CPAs.

In addition, by year’s end contractors need to establish a formal forecast of business activities over the next 12 months. Critical for planning purposes, the forecast also provides comfort to one’s bankers, bonding agents and other financial partners. These financiers need to know how much:

  • Work a contractor has booked over the next 12 months
  • Cash is available
  • Outstanding debt is on the books
  • Equipment needs to be purchased or leased and the like

Laying out projections before year’s end engenders confidence in financial partners and simplifies future financial negotiations.

During this time of year, company owners may also think about their future strategic plans and goals and whether it is time to begin succession planning as they move toward retirement.

Published In: Texas Contractor.

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