The remodeling industry has a growing problem on its hands that must be addressed immediately.
Tax Tips for Contractors
Contractors who reduce their liability can protect themselves against increasing taxes and income assessments by the IRS.
This should be a year of paying close attention to tax preparation and tax accounting details. Contractors who reduce their liability can protect themselves against increasing taxes and income assessments by the IRS.
For example, Houston CPA Jim Trippon says recent tax laws have increased the fixed asset cost expense up to $250,000 for construction contractors. Construction contractors can take advantage of this deduction as long as less than $800,000 of the company's assets is in service within the given year. "Most of the economic stimulus checks have been delivered. However, there are additional funds that may be available. The economic stimulus checks were actually an advance on the 2008 tax liabilities," says Trippon.
Grant Thornton, a distinct legal entity of Grant Thornton International, recently released a set of tax tips for contractors. Todd Taggert, the firm's tax partner and practice leader, advises you to consult your tax adviser before taking any of these steps. "The complexity of current tax law is such that many businesses find it difficult to take advantage of deductions and tax credits that Congress and the President have specifically enacted to benefit them," says Taggert. "This list highlights some of the most common of these areas and is intended to alert our clients and prospects and to encourage them to work with their tax adviser to minimize income taxes."
Make the most of your net operating loss deduction. Recent tax legislation opens up opportunities for taxpayers of all sizes to choose an extended carryback period for net operating losses (NOLs). This provision allows contractors who have NOLs to choose a five-, four- or three-year carryback period (increased from the normal two-year rule) for NOLs incurred in a tax year beginning or ending in 2008 or 2009. Keep in mind, however, that only a single year can qualify for this enhanced carryback period. Taxpayers with NOLs in two or three qualifying years need additional analysis to maximize their cash refunds.
Take a hard look at bonus depreciation deductions. As an incentive for investment in equipment, taxpayers are allowed to deduct half of the cost of 2009 qualifying property in the first year of use and then depreciate the remaining half of the asset over its normal useful life. For five-year equipment (the most common tax life for construction equipment), this allows a deduction of 60 percent of the asset's cost in the first year of its life.
Consider future capital gains and dividend tax rate increases. Under current law, capital gains and qualified dividends are taxed at a favorable 15 percent federal income tax rate. This preferential treatment is scheduled to expire at the end of 2010 and individuals (absent a law change) will face higher taxes on these items in 2011.
Consider not deferring income. The traditional wisdom of deferring income for tax purposes deserves another look. With many government entities looking for increased tax revenues, new tax policies and rate increases are very possible.