Original air date: Nov. 9, 2017 Rebroadcast and recording available at http://www.mhmcpa.com Construction companies have unique tax planning considerations and opportunities to lower their tax liability. In our webinar, we will be discussing some of the strategies available for 2017, including capitalization versus expensing of repairs to large equipment, as well as tax planning tips and tricks, and ways to minimize the impact of the alternative minimum tax.

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CBIZ & MHM
Executive Education Series™
Year-End Tax Planning for the Construction
Industry
Tony Hakes and Erin Olson
Nov. 9 & Nov. 14, 2017

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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

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Presenters
ANTHONY HAKES, CPA, CCIFP
Attest Practice Leader,
CBIZ MHM Phoenix
Based in our Phoenix office, Tony leads our National Construction Industry
Practice Group. He serves a variety of clients including general
contractors, heavy highway contractors, home builders and real estate
developers. He has provided consultation to clients on various accounting
and reporting issues including revenue recognition, joint ventures, leases,
variable interest entities and evaluation of change orders and claims. Tony
is also a designated Certified Construction Industry Financial Professional
(CCIFP).
602.264.6835 • ahakes@cbiz.com

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Presenters
ERIN OLSON, CPA, CCIFP
Senior Tax Manager,
CBIZ MHM Minneapolis
Erin Olson has over 13 years of experience in public accounting. She is
responsible for various tax compliance, tax planning, tax attributes,
consolidated returns, and research matters for both individuals and
corporate entities. Her duties also include review of federal and state
corporate tax returns with multi-state issues as well as year-end tax
planning. She has worked with a variety of clients in real estate and
construction industries. Erin’s experience with clients in the construction
industry includes general contractors, specialty contractors and home
builders.
612.376.1236 • eolson@cbiz.com

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Agenda
Capitalizing vs. Expensing Repairs
02
01
03
04
Year-End Tax Planning Considerations
Alternative Minimum Tax
Questions

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Capitalizing vs. Expensing Repairs

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Capitalizing vs. Expensing Repairs
Tangible Property Regulations:
• In 2013, final regulations were issued clarifying how federal tax
laws apply to tangible property
• Effective for tax years beginning on or after 1/1/2014
• The regulations establish a framework to help taxpayers
determine whether costs are currently deductible or must be
capitalized
• Requires a review of the facts and circumstances
• If amounts paid or incurred are not for an improvement to
tangible property, then the amounts generally are deductible as
repairs and maintenance

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Capitalizing vs. Expensing Repairs
Facts and Circumstances Analysis:
• Determine unit of property (UOP)
• Building – generally the entire building, including its structural
components
• Non-building – each component or group of components
• Functionally interdependent components – cannot place into service
one component without placing into service another component
• Determine if there is an improvement to the UOP
• Betterment
• Restoration
• Adaptation

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Capitalizing vs. Expensing Repairs
Betterment:
• A taxpayer must capitalize a betterment
• Amounts paid to fix a material condition or defect that existed
prior to acquisition or arose during production
• Amounts paid for a material addition, including physical
enlargement, expansion, extension or addition of a major
component
• Amounts paid that are reasonably expected to materially increase
productivity, efficiency, strength, quality or output
• “Material” is not defined in the regulations, therefore a taxpayer
should use common sense and reasonable judgement when applying
to their particular facts and circumstances

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Capitalizing vs. Expensing Repairs
Restoration:
• A taxpayer must capitalize a restoration
• Recognition of gains or losses and basis adjustments
• Deducted a loss
• Realizing gain or loss resulting from sale or exchange
• Result of a casualty loss or event
• Returns the UOP to its ordinarily efficient operating condition if
the property has deteriorated to a state of disrepair and is no
longer functional for its intended use
• Rebuilding of the UOP to a like-new condition
• Replacement of a major component or a substantial structural
part

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Capitalizing vs. Expensing Repairs
Adaptation:
• A taxpayer must capitalize an adaptation
• Amounts paid to adapt a UOP to a new or different use, if not
consistent with ordinary use of the property at the time it was
originally placed into service
• May be required to capitalize even if the result is not an adaptation,
but results in a betterment or restoration

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Capitalizing vs. Expensing Repairs
Repairs:
• A taxpayer may deduct amounts paid for repairs and
maintenance to tangible property if the amounts paid are not
otherwise required to be capitalized
• May elect to capitalize repair and maintenance costs consistent
with its books and records

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Capitalizing vs. Expensing Repairs
Election to Capitalize Repair and Maintenance Costs:
• An election to capitalize repair and maintenance expenses as
improvements for costs incurred in carrying on a trade or
business
• The costs must be treated the same for book purposes
• May prefer convenience and simplicity of following its book
capitalization treatment
• Must consistently apply to all amounts paid during the year
• This is an annual tax return election, made by attaching a
statement to a timely filed original federal income tax return
(including extensions)

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Capitalizing vs. Expense Repairs
De Minimis Safe Harbor Election:
• Allows businesses to deduct expenses for tangible property
that they would have otherwise had to capitalize
• For businesses with applicable financial statements (AFS), the de
minimis safe harbor threshold is $5,000 per item or invoice
• AFS includes audited financial statement
• Requires a written accounting policy in place at the beginning of the
tax year
• For businesses without an AFS, the threshold is $2,500 per item
or invoice
• Written accounting policy is not required

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Capitalizing vs. Expensing Repairs
De Minimis Safe Harbor Election (Continued):
• Businesses must follow this capitalization policy for their books
• Must consistently apply to all amounts paid during the year
• Includes transaction costs (i.e. – delivery fees, installation costs
and similar related service costs)
• Use a reasonable allocation method, such as pro rata allocation
• Cannot componentize property accounted for as a single unit
• This is an annual tax return election, made by attaching a
statement to a timely filed original federal income tax return
(including extensions)

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Capitalizing vs. Expensing Repairs
Safe Harbor Election for Small Taxpayers:
• May be permitted to deduct the costs of work performed on
owned or leased buildings
• Must meet certain requirements:
• Average annual gross receipts of $10M or less
• Owns or leases building property with an unadjusted basis of
$1M or less and
• Total amount paid during the year for repairs, maintenance or
improvements does not exceed the lesser of
• 2% of the unadjusted basis of the eligible property or
• $10,000

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Capitalizing vs. Expensing Repairs
Safe Harbor Election for Small Taxpayers (Continued):
• This is an annual tax return election, made by attaching a
statement to a timely filed original federal income tax return
(including extensions)

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Capitalizing vs. Expensing Repairs
Routine Maintenance Safe Harbor:
• Deemed not to improve a UOP, building structure or building
system, therefore may deduct
• Must meet following criteria:
• Amounts paid for recurring activities that a taxpayer expects to
perform
• As a result of the taxpayer’s use of the property
• To keep the property in its ordinarily efficient operating condition
and
• Taxpayer reasonably expects at the time it is placed into service
• To perform activities of building property more than once during a
10 year period
• To perform activities for property other than buildings more than
once during the class life

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Capitalizing vs. Expensing Repairs
Routine Maintenance Safe Harbor (Continued):
• Activities include inspection, cleaning, testing and replacement
of damaged or worn parts with comparable replacement parts
• Routine maintenance does not include:
• Amounts paid for betterments
• Amounts paid for most restorations
• Exception – replacement of a major component or substantial
structural part or rebuilding to a like-new condition
• Amounts paid for adaptations

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Capitalizing vs. Expensing Repairs
Routine Maintenance Safe Harbor (Continued):
• Generally no action is required to be in compliance with the
tangible property regulations in applying the safe harbor
• If not in compliance a form 3115 “Application for Change in
Accounting Method” is required

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Year-End Tax Planning Considerations

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Year-End Tax Planning Considerations
Construction Industry:
• The construction industry has more accounting method
alternatives than any other industry making it both unique and
complex
• Understanding is critical for preparing accurate tax returns
• This creates opportunity for planning strategies

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Year-End Tax Planning Considerations
2017 Tax Planning Ideas:
• Deferring income and accelerating deductions
• This approach may prove to be especially valuable if Congress
enacts proposed tax reform that reduces tax rates and limits or
eliminates certain deductions and credits in 2018
• Domestic Production Activities Deduction (DPAD) may be repealed
 9% deduction on qualified construction activities
• Interest expense deduction may be limited
• Cash method
 $5M average gross receipts threshold increased to $25M
• Long-term contracts
 $10M average gross receipts exception for requirement to use
percentage-of-completion method (PCM) increased to $25M
• Watch out for the alternative minimum tax (AMT)

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Year-End Tax Planning Considerations
2017 Tax Planning Ideas (Continued):
• $510,000 section 179 expensing on the purchase of qualified
new or used property (i.e. - furniture, equipment, off-the shelf
computer software, qualified real property, etc.)
• Placed into service during 2017, with phase-out beginning at
$2,030,000
• Qualified leasehold improvement or qualified improvement
property eligible for full expensing starting in 2016
• Under proposed legislation, the business expensing limitation
would be increased to $5M and the phase-out increased to $20M

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Year-End Tax Planning Considerations
2017 Tax Planning Ideas (Continued):
• 50% bonus depreciation on the purchase of qualified property
which generally includes new tangible personal property, off-
the-shelf computer software and qualified improvement
property
• Placed into service during 2017
• 2018 decreased to 40% and 2019 decreased to 30%
• Under proposed legislation, taxpayers would be able to fully and
immediately deduct 100% of the cost of qualified property

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Year-End Tax Planning Considerations
2017 Tax Planning Ideas (Continued):
• Qualified leasehold improvements
• Improvements to interior portion of a nonresidential building
• Eligible for a 15 year life, using straight line method
• Building must be at least three years old
• Lease between unrelated parties
• Not including:
 Enlargement of the building
 Elevator or escalator
 Structural component benefiting common areas
 Internal structural framework of the building

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Year-End Tax Planning Considerations
2017 Tax Planning Ideas (Continued):
• Qualified improvement property (new in 2016)
• Improvements to the interior portion of a nonresidential building,
including interior common areas
• Eligible for a 39 year life, using straight-line method
• Building no longer has to meet a three-year test
• Lease no longer has to be between unrelated parties
• Still eligible for bonus depreciation
• Eligible for section 179 if qualified leasehold improvement

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Year-End Tax Planning Considerations
2017 Tax Planning Ideas (Continued):
• Election to capitalize repair and maintenance costs
• May be desirable if the taxpayer has an NOL, expiring tax credits
or little taxable income
• De minimis safe harbor election
• Safe harbor election for small taxpayers
• Routine maintenance safe harbor

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Year-End Tax Planning Considerations
2017 Tax Planning Ideas (Continued):
• Increase basis in your S-corporation or partnership to allow for
utilization of suspended 2017 loss deductions
• Pay expenses with a credit card before year-end to increase
deductions, with no cash outflows until the following year

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Year-end Tax Planning Considerations
Keys Takeaways for 2017 Tax Planning:
• When working on year-end tax planning it is important to look at
your particular situation and planning goals, while minimizing
income taxes where possible
• Many tax strategies must be implemented before year-end to be
effective in mitigating your 2017 tax liabilities, so strategize with
your tax advisor now
• In the absence of clarity and certainty with proposed tax reform, it is
important to strategize for 2017 and to plan for deductions, credits
and tax opportunities that are available now
• The major tax reform efforts that are underway could lead to
elimination or modification of certain tax benefits, however at this
time in 2017 they are still in play

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Alternative Minimum Tax

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Alternative Minimum Tax
Alternative Minimum Tax (AMT):
• AMT is an alternative tax method used to calculate an
individual or corporation’s tax liability
• Created to prevent tax avoidance through excess deductions
• Under this method many common tax deductions are added back to
income in determining this alternate tax liability

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Alternative Minimum Tax
Alternative Minimum Tax (AMT) (Continued):
• Small corporation – always exempt from AMT
• Average annual gross receipts for the three preceding taxable
years does not exceed $7.5M ($5M for corporations initial three
years)
• Regardless of average annual gross receipts, must calculate the
long-term contract adjustment, as well as any other AMT
adjustments
• Once a corporation’s average annual gross receipts exceed $7.5M,
the taxpayer will be subject to AMT for all future tax years

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Alternative Minimum Tax
Alternative Minimum Tax (AMT) (Continued):
• AMT rate for corporations 20% after a $40,000 exemption
• Phased out after $150,000
• Generates a minimum tax credit for any AMT paid
• For AMT purposes, generally the PCM is required for
determining taxable income from long-term contracts
• Small contractors are required to use a simplified costing method,
unless they elect otherwise
• Contractors with average annual gross receipts from the three
preceding tax years not exceeding $10M
• Home construction contracts are not subject to the
requirement to report on PCM for AMT purposes

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Alternative Minimum Tax
Long-Term Contract Adjustment for AMT:
• The AMT adjustment is computed by taking the difference in
the two gross profits (i.e. the gross profit using the taxpayer’s
accounting method for regular tax purposes vs. the gross profit
computed under PCM)

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Alternative Minimum Tax
Other Common AMT Adjustments:
• Depreciation of post-1986 property
• No adjustment when bonus depreciation and/or section 179
depreciation taken on the asset
• Assets placed into service after 2015 no longer subject to adjustment
when electing out of bonus depreciation
• Adjusted gain or loss on disposition of property
• Tax exempt interest income from specified private activity
bonds
• Other adjustments and preferences
• DPAD – 9% of the lesser of qualified production activities income
or alternative minimum taxable income

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Alternative Minimum Tax
Proposed Tax Reform:
• After 2017, AMT would be repealed
• Taxpayers able to claim a refund of AMT credit carryforwards

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QUESTIONS

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If You Enjoyed This Webinar…
Upcoming Courses:
• 11/16 & 11/28: Implementing the new Not-for-Profit Financial Statement
Presentation
• 12/4 & 12/14: Critical Disclosures - New Revenue Recognition Requirements
• 12/6 & 12/13: Opportunities to Offset Payroll Tax Liabilities with Research and
Experimentation Credit
• 12/14: Tax Considerations for Debt-Financed Distributions from Partnerships
Owned By Private Equity
Recent Publications:
• Six Audit Risks to Watch for with the New Revenue Recognition Standard
• Six Accounting Updates You Don’t Want to Forget for Year-End
• Accounting Updates You Need to Know from Q3 2017

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