Contractors Center Point

Positive Changes for Contractor Cell Phone Reimbursement Rules

As reported by the Construction Financial Management Assocociation in its November Newsletter, The IRS has released new contractor-favorable guidance that will allow contractors and employees to exclude the value of employer-provided cell phones from employee income without burdensome documentation requirements. The IRS guidance includes 1) a notice and 2) an internal memo to IRS examiners, both of which were issued in the wake of a statutory change made by the Small Business Jobs Act of 2010.

The statutory change removed employer-provided cell phones from the definition of “listed property.”  Under tax law, contractors may not take a deduction for “listed property” unless the contractor can prove a business use. Prior to the new cell phone rules, all employees using employer-provided cell phones needed to prove that they were using their phones for business to receive an expense reimbursement, and then include the value of their personal use in their income. The requirements for proving business use were extensive and burdensome for both employees and contractors.

The new rules hold that if there are substantial “business reasons” for an employer to provide a cell phone to an employee (other than simply to provide the employee with the cell phone as a form of compensation), the value of any use of an employer-provided cell phone is excludable from the employee’s income. The IRS indicated that the business use of the cell phone will qualify as “a working condition fringe benefit,” and the personal use as “de minimis fringe benefit,” which means that employer-provided cell phone use now is deductible by the contractor and tax-free to the employee, without the burden of having to prove the business use, and without needing to separate personal use from business use.

Surety Underwriters’ Outlook for Construction Markets Sours

Surety underwriters have a downbeat outlook for the recovery of construction markets, according to FMI’s second annual Survey of Surety Providers. Sixty-two percent of respondents said the U.S. nonresidential construction market will not experience growth until 2013, and 19 percent do not expect the recovery to occur until 2014.

The results are in marked contrast to FMI’s 2010 survey results, according to which the majority of respondents expected the downturn to end by late 2010 or early 2011. Only 5 percent of 2011 respondents are confident that their client construction firms are “well-positioned,” with good exposure to stable or growing markets. Surety underwriters are concerned that firms are failing to reduce overhead costs and straying from core competencies. Fifty-seven percent of respondents expect their clients to have more difficulty in obtaining bonding one year from now, and 67 percent believe clients will have more difficulty obtaining a bond two years from now.

 “Surety providers look at three key factors when considering bonding applications: the expertise of the management team, the strength of the balance sheet and project history,” says Curt Young, vice president of FMI’s Investment Banking Group, which conducted the survey. “If a company is struggling financially, it is likely they have engaged in business practices that will have a detrimental impact on their long-term success.”

To learn more about this report please visit FMI's website at www.fminet.com. To learn more about financial and economic information impacting the construction industry, please contact the construction professionals of McKonly and Asbury, LLP.

IRS Issues Guidance For Reporting Health Care Costs On Employees’ W-2S

The Internal Revenue Service (IRS) in January offered additional guidance on a provision in the Patient Protection and Affordable Care Act that will require employers to report the cost of coverage under an employer-sponsored group health plan on each employee’s W-2 form.

Under the new guidance, the IRS reinforced its previous statements that reporting is optional for 2011 W-2’s that will be issued this month, but will become mandatory on 2012 W-2’s issued in 2013. Employers who distribute fewer than 250 W-2’s are exempt from the reporting requirement until at least 2014, and possibly longer.

The guidance also clarifies that employers can, but are not required to, report contributions to health reimbursement arrangements in calculating health care costs. In addition, the cost of providing coverage through employee assistance programs, wellness programs or onsite medical clinics is not required to be reported if the employer does not charge premiums for the coverage to COBRA beneficiaries.

The cost of coverage that is taxable to employees, such as for a dependent over age 26, must be reported on the W-2 and contributions employees make to flexible spending accounts are to be excluded from the health care cost figures.

For more information, visit the IRS website or contact the construction professionals of McKonly and Asbury, LLP..

Housing Climbing Out of The Basement, Will Support Growth in 2012 and 2013

On December 21, PNC Bank Economic Division issued a report regarding the current and future outlooks of the housing market. PNC reports that the housing market will grow in 2012 and 2013. Highlights of the report are as follows:

  

•  Housing data released for November 2011 show better homebuilding and sales activity than anticipated
• Activity remains at low levels, but is improving; most of the growth in construction is coming from multifamily housing
• There were downward revisions to existing home sales from 2007 forward, but this does not change the outlook.
• A housing turnaround will contribute to modest but sustained economic recovery in 2012

Click Download Housing to read the full report. For further information on the construction industry, please contact the construction professionals of McKonly and Asbury, LLP.

Research and Development Tax Credits - Does Your Company Qualify?

The Research & Development (R&D) Tax Credit can provide, among other things, a hidden and immediate source of cash for many companies as well as a significant reduction to current and future years’ federal and state tax liabilities. 

 Do you design, develop or improve prod­ucts, processes, techniques, formulas, inven­tions or software? If your company has in­vested time, money and resources towards the advancement and improvement of its products and processes, then you may qual­ify for the R&D tax credit. The R&D tax credit regulations allow eligible taxpayers to “look back” to all open tax years (typically 3 years plus the current year) for potential R&D cred­its that were never claimed. 

Today's contractor may not realize that their activities may entitle them to generous R&D tax incentives, and even if they do, the traditional notions of R&D may cause contractors to limit qualified research expenditures to activities associated with new product and invention developments. However, in many cases, contractors spend a considerable amount of time and effort to develop designs and processes that achieve optimized engineering process performance. Furthermore, many contractors conduct extensive activities to design and develop the engineering processes themselves to achieve specific project requirements or to stay ahead of competitors in the marketplace. All these activities may require time and money both in the engineering department and on the job site itself, which may be captured as qualified research expenditures leading to significant tax benefits. If you think you have to be a large public corporation developing products and inventions to be conducting qualified activities as defined by the Internal Revenue Code, think again.

If your company is in the contracting industry and you've recently introduced new or improved designs or processes there is a strong chance that you could benefit from an R&D tax credit study.

Examples of activities and innovations eligible for R&D tax incentives include the following: 

• Means, methods and construction techniques development

• Structure and facility design for constructability

IRS Issues Standard Mileage Rates For 2012

The Internal Revenue Service (IRS) Dec. 9 announced the 2012 optional standard mileage rate to use for computing the deductible costs of operating an automobile for business will be 55.5 cents per mile. 

The new rate will go into effect beginning Jan. 1, 2012, and will apply to the use of cars, vans, pickup trucks or panel trucks. 

The standard mileage rates for business purposes are based on an annual study of the fixed and variable costs of operating an automobile.  A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle.  The business standard mileage rate cannot be used for more than four vehicles used simultaneously.   

For more information on the standard mileage rates, visit the IRS website.

AIA Report Finds Ongoing Credit Crunch Accounts for 20 Percent of Stalled Projects Nationwide

The American Institute of Architects (AIA) today released a comprehensive report which concludes that the major obstacle holding back job creation in the United States is the persistent lack of construction financing, despite record low interest rates.

“This report should lay to rest any doubt about what is a key source for holding back job creation in the United States,’ said Kermit Baker, chief economist of the AIA. “It is the lack of financing especially to the design and construction sector, which accounts for $1 in $9 of U.S. Gross Domestic Product.”

Relying on data compiled by McGraw-Hill Construction and Reed Construction Data, the report found that: 

•  
  • The share of projects stalled due to financing problems through August 2011 has almost doubled since 2008;
  • One-in-five stalled projects are directly resulting from financing problems;
  • Financing problems account for a higher share of stalled projects in the education and multi-family sector;
  • More than 25 percent of projects reported as stalled due to the credit crunch could qualify for LEED, Green Globes or other green certification status;
  • Financing issues are less of a factor holding back projects in the manufacturing, private healthcare and retail environments.

“Whatever, the reason – be it over-regulation, the threat of a double-dip recession or the reluctance to have too many loans on the books, lenders are just not lending to a major job-producing sector of the American economy,” Baker noted. “Until more credit is extended, the potential of non-residential construction to promote greater levels of economic growth will not be realized.” 

To learn more about this report please visit www.aia.org or contact the construction professionals of McKonly and Asbury, LLP.

2012 Construction Forecasts Provide Mixed Review

Multiple reports from various sources have been published in the last few weeks regarding the 2012 forecast for the construction market. All reports point to a continued slow recovery of the construction sector of the economy with one report showing 0 percent growth in 2012.

Associated Builders and Contractors

Associated Builders and Contractors (ABC) expects 2012 to be a year of gradual advancement in the industry, primarily driven by private construction. ABC is forecasting that nonresidential construction spending will increase approximately 2.4% in 2012. This is following a decrease of 2.4% in 2011. Along with this increase in nonresidential construction spending, employment is also expected to increase, but very little, at a rate of 0.4%. This increase follows a 2011 year which saw employment in this sector increase by 0.6%.

ABC believes that the increase in nonresidential construction will be driven by the energy and health care sectors of the United States economy. Construction related to the nation's power industry is expected to increase 9% in 2012 and is forecast to end 2011 with a 11.4% increase. States that are expected to see the majority of this construction spending are Texas, Oklahoma, North Dakota and Pennsylvania. Health care is also expected to expand with a projected increase in 2012. With continual changes in demographics, health care reform and overall thawing credit markets, construction in this sector is projected to increase 8% in 2012. Other areas of increase are expected in lodging and office construction but minimal.

These increases are expected to be offset by declines in public spending and education. With state and local government budgets continuing to be squeezed and school districts under pressure to hold the line on spending, public improvement projects in these areas are expected to decline in 2011 by 4%. Overall, ABC forecasts public nonresidential construction spending to slip 2% in 2012.

President Signs 3 Percent Withholding Tax Repeal Into Law

Repeal of the three percent withholding tax repeal contained in section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was signed into law by President Barack Obama on Nov. 21.

The bill, H.R. 674, was passed in a 422-0 vote by the U.S. House of Representatives on Nov. 16 and was approved a week earlier by a unanimous vote in the Senate. The bill amends the Internal Revenue Code to repeal the 3 percent withholding tax for government contractors.

The withholding mandate, hidden in the fine print of TIPRA, would have required 3 percent to be withheld on all payments for goods and services made by federal, state and local governments with total expenditures of $100 million or more beginning Jan. 1, 2013.  Implementation of the provision had been subject to annual delays by Congress and regulators, respectively, until bipartisan support for repeal coalesced during the recent focus on jobs legislation. 

To learn more about legislative happenings within the construction industry, please contact Associated Builders and Contractors at www.abc.org or the construction professionals of McKonly and Asbury, LLP.

Construction Backlog Indicator Shows Stagnant Third Quarter Activity

On Tuesday November 15, 2011, Associated Builders and Contractors (ABC) today released its Construction Backlog Indicator (CBI) for the third quarter of 2011. At 8.1 months, the third quarter CBI remained unchanged from the previous quarter, but was up 16.3 percent from a year ago. CBI is a forward-looking economic indicator that measures the amount of construction work under contract to be completed in the future.

“The lack of increase in the CBI last quarter appears to be a symptom of the soft patch in economic momentum experienced in the middle of this year, as well as the ongoing and elevated level of uncertainty regarding Europe, financial markets and other aspects of economic life,” said ABC Chief Economist Anirban Basu.

“A backlog of less than 8 months is associated with construction spending declines, while a backlog exceeding 8 months is statistically associated with future construction spending increases,” said Basu. “Today’s level of backlog is consistent with flat construction spending.

“The implication of the most recent CBI data is that momentum in the U.S. nonresidential construction industry is in the process of stalling,” said Basu. “The question remains: Will the nation’s commercial and industrial construction industries face a long-term slump or become reinvigorated in the new year?”

Regional Highlights

• Regional construction backlog grew in the Northeast and the South from the second quarter to the third quarter, but shrank in the Middle States and the West. On a year-over-year basis, backlog is higher in every region of the nation with the exception of the Northeast.
• The South continues to report the lengthiest construction backlog of any major region at 9.41 months, and is 35 percent higher than one year ago.
• Construction backlog in the Middle States continues to be the shortest at 6.5 months.

Industry Highlights

• Average construction backlog in the nation’s infrastructure industry surged during the third quarter, with backlog expanding from 7.9 months a quarter ago to 9.2 months.
• In the commercial and institutional category, construction backlog took a step back, falling from 8.6 months during the second quarter to 8.4 months in the third quarter.
• Construction backlog rose in the heavy industrial category to 5.9 months during the third quarter, but is still down from year-ago levels and is lowest among all categories monitored by ABC.

Highlights by Company Size

• During the past quarter, firms in the $100 million or more category experienced the largest construction backlog at 9.8 months – the highest level for this category in the history of the CBI.
• For firms with annual revenues of less than $30 million, construction backlog declined from 7.5 months to 7.1 months.
• Construction backlog for firms in the $30 million to $50 million category saw a slight decrease from 9.8 months in the second quarter of this year to 9.7 months in the third quarter.

For more information on the CBI please contact Associated Builders and Contractors at www.abc.org or contact the construction professionals of McKonly and Asbury, LLP.