Welcome toSurviving & Thriving in our Current Economy
Bank Perspectives on ConstructionLending in a Tough Credit EnvironmentModerator - Robert W. McLeodUniversity of Alabama, P...
Punch List for a Healthy Financial Statement     Bryan R. Chandler    Managing Shareholder
Three C’s of Contract Surety Underwriting1.    Character     a) Management team     b) Integrity     c)   Reputation     d...
Three C’s of Contract SuretyUnderwriting (Continued)2. Capital   a) Profitability   b) Working Capital   c)   Net Worth   ...
Three C’s of Contract SuretyUnderwriting (Continued)3. Capacity   a) Ability to do the work   b) Contract terms   c)   Ope...
Causes of Contractor Failures• Substantial and sudden increase in job size• Expansion into new geographic areas, new types...
Causes of Contractor Failures(Continued)• Accounting systems not equipped to track  construction costs on a job-by-job bas...
Punch Items for a Healthy FinancialStatement• Don’t focus solely on the income statement.• Bankers and sureties use the en...
A picture makes an impression of howyou operate.
Do your best to always make a goodpicture.
Be careful of trying to paint a picture thatis not “real”. It may be easy to spot.
Key Elements in the Contractor’sFinancial Statement•   Contract schedules•   Retainage•   Over/under billings•   Unapprove...
Contractor KPIs(Key Performance Indicators)• Liquidity• Net worth• Profitability• Debt covenants
Contractor Warning SignsEquity Ratios    • Debt to equity > 3 to 1    • Working capital to equity < 1.3 to 1    • Interest...
Contractor Warning Signs (Continued)Liquidity/Working Capital Ratios    • Average age of receivables > 60 days    • Averag...
Contractor Warning Signs (Continued)• Development activities• Investment in non construction activities• Increasing or con...
Questions?
Welcome toSurviving & Thriving in our Current Economy
Tax Tips for Your Tool BoxKim SmithKaty Beth Jackson
Tax Tips•   Construction industry methods of accounting•   Maximizing depreciation deductions•   Domestic production activ...
Tax Traps• Pitfalls of construction industry methods of  accounting• Limits on accelerated depreciation• Limits on the dom...
Tax Tips: Construction industrymethods of accounting• Methods of accounting for construction  contractors    - Cash    - A...
Tax Tips: Construction industry methodsof accounting• What is the tax definition of a long-term  contract?• Examples of lo...
Tax Tips: Construction industrymethods of accounting• Completed contract method of accounting for  long-term contracts   •...
Tax Traps: Pitfalls of           construction industry methods           of accounting• Completed Contract    - Losses on ...
Tax Tips: Maximizing depreciationdeductions• Section 179 Expense (chart on next slide)    - Applies to new or used propert...
Tax Tips: Maximizing depreciation    deductionsSection 179 limits                                     Maximum Sec. 179   M...
Tax Traps: Limits on accelerated           depreciation• Section 179    - Taxable income limitation• Bonus depreciation   ...
Tax Traps: Limits on            accelerated depreciation• Basis issues for pass-through entities:    - Applies to pass-thr...
Tax Traps: Limits on             accelerated depreciation• Basis issues for pass-through entities   - An owner generally m...
Tax Traps: Limits on             accelerated depreciation• Financing new assets – should I use accelerateddepreciation?   ...
Tax Tips: Domestic production activitiesdeduction• Deduction equal to 9% of qualified domestic production activities incom...
Tax Tips: Domestic production activitiesdeduction• Qualified domestic production activities income   - Net income from man...
Tax Traps: Limits on domestic             production activities             deduction• IRS has moved DPAD to its Tier I li...
Tax Tips: Maximizing tax deductions forentertainment facilities and per diem• Good recordkeeping is a must for tax savings...
Tax Traps: Pitfalls of             entertainment facilities and             per diem• Entertainment Facilities and Persona...
Tax Traps: Pitfalls of              entertainment facilities and              per diem• Entertainment Facilities and Perso...
Questions?
Welcome toSurviving & Thriving in our Current Economy
Blueprintsfor SuccessKim SmithTax Manager
Construction Practice GroupShareholders        Bryan        Chandler        CPA, CFP, PFS        Managing        Tracie   ...
Other JMF Services         Pension Administration, Audits & Consulting         Specializing in Network Systems of two to 2...
Additional JMF Resources    The nation’s premier provider of specialty tax services including help    for businesses compe...
An accounting firm that gives you anadvantage – that’s who we are.
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Construction Seminar Tax and Audit Tips

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Construction Seminar Tax and Audit Tips

  1. 1. Welcome toSurviving & Thriving in our Current Economy
  2. 2. Bank Perspectives on ConstructionLending in a Tough Credit EnvironmentModerator - Robert W. McLeodUniversity of Alabama, Professor of Finance and the John BickleyFaculty Fellow in Finance and Insurance at the University of Alabama.Chairman of Financial Economics Consulting Group, Inc.Panelists• Bank of Tuscaloosa, VP Walker Evans• Bryant Bank, SVP Kevin McMahon• First National Bank of Central Alabama, EVP Jim Clayton• Regions Bank, SVP Charlie Dunn• Renasant Bank, City President Kyle Faught
  3. 3. Punch List for a Healthy Financial Statement Bryan R. Chandler Managing Shareholder
  4. 4. Three C’s of Contract Surety Underwriting1. Character a) Management team b) Integrity c) Reputation d) Honesty e) Trust
  5. 5. Three C’s of Contract SuretyUnderwriting (Continued)2. Capital a) Profitability b) Working Capital c) Net Worth d) Line of Credit e) “Off balance sheet” value
  6. 6. Three C’s of Contract SuretyUnderwriting (Continued)3. Capacity a) Ability to do the work b) Contract terms c) Operations d) Experience e) Type of work
  7. 7. Causes of Contractor Failures• Substantial and sudden increase in job size• Expansion into new geographic areas, new types of construction and business• Changes in key personnel• Lack of managerial skills• Under capitalized• Inadequate working capital and credit lines
  8. 8. Causes of Contractor Failures(Continued)• Accounting systems not equipped to track construction costs on a job-by-job basis• Failure to properly estimate job profitability and cost to complete• Poor billing and collection procedures• Co-mingling of personal and business• Contractual obligations misunderstood• Inability to produce accurate internal financial statements
  9. 9. Punch Items for a Healthy FinancialStatement• Don’t focus solely on the income statement.• Bankers and sureties use the entire financial statement, including footnotes and supplemental disclosures and schedules.• The balance sheet is a “point in time” financial snapshot of the assets, liabilities and net worth of the company.• The other elements of the financial statements also paint a “picture” of your company’s operations.• It is important to run your company so you make a good “picture”.
  10. 10. A picture makes an impression of howyou operate.
  11. 11. Do your best to always make a goodpicture.
  12. 12. Be careful of trying to paint a picture thatis not “real”. It may be easy to spot.
  13. 13. Key Elements in the Contractor’sFinancial Statement• Contract schedules• Retainage• Over/under billings• Unapproved change orders/claims• Fade analysis• Backlog – revenue and profit• S Corporation income tax disclosures• Material changes in estimates• Joint ventures
  14. 14. Contractor KPIs(Key Performance Indicators)• Liquidity• Net worth• Profitability• Debt covenants
  15. 15. Contractor Warning SignsEquity Ratios • Debt to equity > 3 to 1 • Working capital to equity < 1.3 to 1 • Interest bearing debt to equity > 80% • Overhead to equity > 1 to 1Billings Ratios • Underbillings to equity > 20% • Cash to overbillings < 1 to 1 “Underbillings are unusual and overbillings should be in the bank.”
  16. 16. Contractor Warning Signs (Continued)Liquidity/Working Capital Ratios • Average age of receivables > 60 days • Average age of payables > 45 days • Revenue to working capital > 20 to 1 • Revenue increasing > 50% in one yearOperating Ratios • Job profit fade > 10% • Overhead increasing > 50% in one yearOther Red Flags • Related party receivables • Shareholder loans
  17. 17. Contractor Warning Signs (Continued)• Development activities• Investment in non construction activities• Increasing or constant bank borrowing• Purchase of substantial amount of fixedassets in one year• Operating losses for two consecutive years• Substantial decrease in backlog• Non-existent or incomplete contractdisclosure in financial statements
  18. 18. Questions?
  19. 19. Welcome toSurviving & Thriving in our Current Economy
  20. 20. Tax Tips for Your Tool BoxKim SmithKaty Beth Jackson
  21. 21. Tax Tips• Construction industry methods of accounting• Maximizing depreciation deductions• Domestic production activities deduction• Maximizing tax deductions for entertainment facilities and per diem
  22. 22. Tax Traps• Pitfalls of construction industry methods of accounting• Limits on accelerated depreciation• Limits on the domestic production activities deduction• Pitfalls of entertainment facilities and per diem
  23. 23. Tax Tips: Construction industrymethods of accounting• Methods of accounting for construction contractors - Cash - Accrual - Accrual excluding retentions• Tax definition of a long-term contract - Completed contract method - Percentage of completion method • De minimis exception for percentage of completion method
  24. 24. Tax Tips: Construction industry methodsof accounting• What is the tax definition of a long-term contract?• Examples of long-term contracts• This tax definition may differ from the one used in your financial statement reporting
  25. 25. Tax Tips: Construction industrymethods of accounting• Completed contract method of accounting for long-term contracts • May be used by any contractor whose 3-year average annual gross receipts are $10 million or less on jobs expected to be completed within two years • Timing of recognition of contract income and contract expenses on your tax return • Remember to allocate some of your indirect general & administrative expenses to job costs • Benefits of using this method • Generally, results in maximum deferral of taxable income • Simpler
  26. 26. Tax Traps: Pitfalls of construction industry methods of accounting• Completed Contract - Losses on underperforming jobs arent recognizable until the contract is complete - Bunching of income may occur if several contracts become complete in the same year - AMT adjustment for Long Term Contracts• Percentage of Completion - Potential loss of deferral
  27. 27. Tax Tips: Maximizing depreciationdeductions• Section 179 Expense (chart on next slide) - Applies to new or used property - 2011 allowable expense $500,000• Bonus Depreciation - Only applies to NEW property - No limit on bonus - 100% for purchases in 2011
  28. 28. Tax Tips: Maximizing depreciation deductionsSection 179 limits Maximum Sec. 179 Maximum Investment Expense Allowed in Sec. 179 Property * 2011 $500,000 $2,000,000 2012 125,000 500,000 2013 and thereafter 25,000 200,000*The dollar-for-dollar phase out begins at this level
  29. 29. Tax Traps: Limits on accelerated depreciation• Section 179 - Taxable income limitation• Bonus depreciation - No used property - No real property other than qualified leasehold improvements• Basis issues for pass-through entities• Financing purchase of assets vs. accelerated depreciation
  30. 30. Tax Traps: Limits on accelerated depreciation• Basis issues for pass-through entities: - Applies to pass-through entities (S corporation, partnership/LLC) - Basis can be complicated and can be affected by many different things - The basics: • Income and money contributed to the business by an owner increase basis • Expenses and money taken out of the business by an owner decrease basis
  31. 31. Tax Traps: Limits on accelerated depreciation• Basis issues for pass-through entities - An owner generally must have positive basis to get the full benefit of most tax deductions • Disallowed losses or deductions carry over indefinitely • In an S corporation, Sec. 179 can be especially tricky - It is a deduction which is commonly hung up in basis limitations because owners may only deduct it on their personal return if they have positive basis after considering income earned and distributions taken out of the business
  32. 32. Tax Traps: Limits on accelerated depreciation• Financing new assets – should I use accelerateddepreciation? - If you choose to finance the purchase of a major asset, weigh the options: • Downside of depreciating the entire cost of the asset in year purchased • Consider how long you plan to own the asset • Watch out for recapture if you sell • Remember to check taxable income and consider it when deciding
  33. 33. Tax Tips: Domestic production activitiesdeduction• Deduction equal to 9% of qualified domestic production activities income for 2011• Paper deduction that requires no cash outlay• For pass-through entities, the deduction does not reduce an owner’s basis in any way, so it does not cause limitations on the use of other tax benefits• General contractors and subcontractors may qualify
  34. 34. Tax Tips: Domestic production activitiesdeduction• Qualified domestic production activities income - Net income from manufacturing and production activities conducted in the U.S., including real property construction activities and from engineering and architectural services performed in connection with such construction - The project must involve the initial construction or substantial renovation of real property, including, but not limited to: • Buildings and their structural components, permanent land improvements, oil and gas wells, and infrastructure
  35. 35. Tax Traps: Limits on domestic production activities deduction• IRS has moved DPAD to its Tier I list.• February 24, 2011 Tax Case “Gibson” - repair vs. substantial renovation• Two limitations - W-2 Wages and Income Limitation
  36. 36. Tax Tips: Maximizing tax deductions forentertainment facilities and per diem• Good recordkeeping is a must for tax savings in these areas: - Entertainment - Shareholder personal use of auto - Per diem• What should the records show? - How much was paid and when/where was it paid - Business purpose - Business relationship among people involved• Potentially large tax savings are available if you handle the recordkeeping correctly
  37. 37. Tax Traps: Pitfalls of entertainment facilities and per diem• Entertainment Facilities and Personal Use of Auto – Entertainment Facilities • Includes hunting camps, boats, condominiums – No deduction allowed – Includes Depreciation and operating costs, maintenance costs, and losses on disposition. • Club Dues – Nondeductible if for business, pleasure, recreation or other social purpose – Deductible if for professional organization, civic or public service organizations as long as primary purpose is not entertainment. • May include club dues as taxable wages subject to employment taxes to receive deduction.
  38. 38. Tax Traps: Pitfalls of entertainment facilities and per diem• Entertainment Facilities and Personal Use of Auto – Personal Use of Auto • Limitation on depreciation unless employee pays for personal use or the company reports the personal use on the employees W-2 • May use Annual Lease Value Table to compute personal use• Per Diem – Paid by contractor for lodging, meals and incidental expenses – To be fully deductible, must be paid at or below the federal per diem rate for the location – May not pay per diems in excess of allowable federal rate without including in the employees W-2
  39. 39. Questions?
  40. 40. Welcome toSurviving & Thriving in our Current Economy
  41. 41. Blueprintsfor SuccessKim SmithTax Manager
  42. 42. Construction Practice GroupShareholders Bryan Chandler CPA, CFP, PFS Managing Tracie Kim Karen Shareholder Manderson Smith Tenbarge CPA CPA CPA Manager Manager Supervisor Scott Goldsmith CPA Katy Beth Jessica Kris Jackson Morris Walters Leighanne CPA CPA Senior Faught Senior Senior CPA Support: Bobby Bragg, CPA | Practice Growth, Amy Echols| Marketing Director & Kelly Jones, CPA | Firm Administrator
  43. 43. Other JMF Services Pension Administration, Audits & Consulting Specializing in Network Systems of two to 200 Computers. Client Service Department Payroll Tax Compliance, Outsourced CFO and Bookkeeping, Quickbooks ProAdvisor Consulting and Accounting Systems Consulting.Estate & TrustSet-up & Consulting, Succession Planning and Tax PreparationSales/Use Tax Review
  44. 44. Additional JMF Resources The nation’s premier provider of specialty tax services including help for businesses competing for government-sponsored tax credits and incentives. The nation’s oldest and largest firm dedicated to cost segregation studies.R&D Studies| Section 179d Energy Studies | Cost Segregation Studies
  45. 45. An accounting firm that gives you anadvantage – that’s who we are.

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