Contractors Center Point

Pennsylvania’s Form 1099-MISC Reporting Requirement

Each January, the Internal Revenue Service requires businesses to provide 1099-MISC forms for payments made to independent contractors associated with non-employee compensation.  The IRS also requires that a duplicate copy be filed at a later date with their office, so that the IRS can match the income on the individual’s personal return. Pennsylvania now requires that a 1099-MISC also be filed with the Pennsylvania Department of Revenue for the 2012 tax year. 

Under Pennsylvania Act 85 of 2012, entities paying either nonemployee compensation for Pennsylvania-based work or Pennsylvania-source oil/gas lease payments are required to submit copies of federal forms 1099-MISC to the Pennsylvania Department of Revenue.  The forms are required for payments of Pennsylvania-source income to resident and nonresident individuals, entities treated as partnerships for tax purposes or single-member limited liability companies from any entity required to provide form 1099-MISC to the federal government with respect to these payments. The same due dates apply for Pennsylvania as they do for the IRS as will be discussed below.

A business can file the 1099-MISC forms with the Department of Revenue in one of two ways:  

• A business that has a Pennsylvania employer withholding account can submit the forms electronically through e-TIDES. The forms will have to be filed using a multi-import file     upload.  This method of transmission is required for these businesses if 250 or more 1099-MISC forms are submitted.  Forms filed electronically are due March 31^st (April 1^st for this reporting year).
• If a business does not have a Pennsylvania employer withholding account, they must file the forms by paper and mail to the PA Department of Revenue, P.O. Box 280412, Harrisburg, PA 17128-0412.  Businesses that have a Pennsylvania employer withholding account but file less than 250 1099-MISC forms can use either method. Forms filed by paper are due February 28^th. 

The same 1099-MISC form used to report Federal payments should also be used for Pennsylvania.  Pennsylvania also follows Federal for applicable payment thresholds. Pennsylvania requires entities to report payments made to a nonemployee contractor when payments of Pennsylvania-source income exceed a total of $600 in a calendar year, similar to the IRS $600 threshold.  As previously discussed, only Pennsylvania-sourced income should be reported to the Pennsylvania Department of Revenue.  However, if this is not possible, Pennsylvania requests that boxes 16, 17 and 18 of the form 1099-MISC be completed.

To learn more about the new Pennsylvania 1099-MISC reporting requirement, please contact the construction professionals of McKonly and Asbury, LLP. 

H.R. 8 - The American Taxpayer Relief Act, What Does It Mean for Construction

On January 2, 2013, Congress averted the "Fiscal Cliff" by passing the American Taxpayer Relief Act. This Legislation was immediately signed into law by the President of the United States. "From a pure tax perspective, the construction community obtained several victories,” as reported by the American Subcontractors Association in their report ASA Special Report on Averting the ‘Fiscal Cliff’ — H.R. 8, the American Taxpayer Relief Act and other construction organizations. The major provisions of the law are outlined below:

• An increase in direct expensing amounts under Internal Revenue Code Section 179 for tax years 2012 and 2013: $500,000 can be written off in a year and a taxpayer cannot use the provision if more than $2,000,000 of equipment and machinery is purchased in the year. Neither amount is inflation-indexed.
• An extension of the 50 percent depreciation bonus through 2013.
• A permanent “patch” of the Alternative Minimum Tax, including indexing to inflation of income thresholds at which the tax may apply. The thresholds for 2012 income are $78,750 for married couples filing jointly and $50,600 for individuals.
• The continuation of 2012 dividend and capital gains rates at the special rates of zero and 15 percent, except for a new maximum 20 percent rate for individuals with taxable income over $400,000 ($450,000 for married couples).
• A permanent continuation of the estate tax provisions enacted in 2010, except for the top marginal rate, which increases from 35 to 40 percent. The exemption is $5 million inflation-adjusted (it was $5.12 million for 2012).
• An extension of targeted tax provisions, including: 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements; the credit for energy-efficient existing homes; and the deduction for state and local general sales tax.
• An extension of the research and experimentation credit for 2012 and 2013.
• The continuation of individual income tax brackets and rates at approximately the same levels as 2012 for individuals with incomes $400,000 and below, except for a new, higher 39.6 percent bracket for incomes over $400,000 for individuals ($450,000 for married couples). Brackets will be adjusted for inflation.
• The end of the “tax holiday” for the employee portion of FICA tax, which returns to 6.2 percent, from 4.2 percent.

While this legislation has addressed the immediate issues of tax rates several major issues such the debt limit (Feb. 2013), deficit reduction (March 2013) and significant tax reform (Fall 2013) have been left unaddressed, meaning that 2013 is likely to bring more congressional brinkmanship.

To learn more about the tax law changes, contact the construction professionals of McKonly and Asbury, LLP.

Pennsylvania Sales/Use Tax Issues for Mining Site Preparation

The Department of Revenue offers this sales and use tax guidance to taxpayers who clear land and prepare a site in anticipation of mining operations to be conducted at that site. This guidance is necessary because the Department’s mining regulation, 61 Pa. Code § 32.35, details the application of the sales and use tax law as applied to traditional and strip mining, but is not as specific concerning modified or enhanced mining processes, such as hydraulic fracturing used in unconventional oil and gas well development. Although much of the work done for mining site preparation does not qualify for the mining exclusion, the exclusion is available for certain site work.

Pennsylvania law excludes from sales and use tax machinery, equipment, parts and foundations therefore, and supplies that are predominantly used directly in mining operations. 72 P.S. § 7201(k)(8); 61 Pa. Code § 32.35(a). Even if property may be considered essential to the conduct of the business of mining because its use is required either by law or practical necessity, that does not necessarily mean that the property qualifies for the tax exclusion. 61 Pa. Code § 32.35(a)(1)(iii). For example, property used prior to the actual mining operation, such as property used to store raw materials prior to their use in the mining operation, is not considered to be directly used in mining and is subject to tax. 61 Pa. Code § 32.35(a)(3)(iii)(G). Also, “property used for waste handling and disposal of pollutants other than in the course of production operations” is taxable unless the equipment, machinery and supplies are designed and used to control, abate or prevent air, water or noise pollution generated in the mining operation. 61 Pa. Code §§ 32.35(a)(2)(ii) and (a)(3)(iii)(J).

The regulation specifically states that the mining exclusion does not apply to property or services used in the “construction, reconstruction, alteration, remodeling, servicing, repairing, maintenance or improvement of real estate.” 61 Pa. Code § 32.35(a)(3)(i). That clause further states that “property used to remove trees and clear ground preparatory to extraction activities is not deemed to be directly used” and therefore not covered by the mining exemption.

Generally, equipment and parts used in site preparation – including, but not limited to, removal of timber, building of access roads and removal of dirt and rocks from the land – are taxable as pre-mining activities. However, the foundation directly underneath the drilling rig is excluded from tax. Therefore, although equipment used to build rigging pads is taxable, any foundation material supporting the drilling rig, such as sand, stone or other similar material, would be excluded from tax as foundation material for exempt mining equipment. The construction of ponds or any other vessels for storage of fresh water or raw materials prior to their use in drilling or hydraulic fracturing is not a mining activity.

Therefore, equipment used to construct these ponds and the actual materials used in the ponds, such as liners, are taxable pre-mining property. Ponds to be used to control or abate pollution generated in the mining operation, however, are excluded from tax. Therefore, although equipment used to build such ponds is taxable, any materials used in that construction, such as liners, sand and gravel, would be excluded from tax.

Tp learn more aboiut sales and use tax related to mining activities, please contract the construction professionals of McKonly and Asbury, LLP.

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.

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..

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.

New Local Tax Withholding Requirements for Contractors

As we approach 2012, there has recently been much attention given to the new local earned income tax requirements that take effect for employers operating in Pennsylvania.  Act 32 was passed in 2008 but has not received much attention until now as the full implementation will be effective 1/1/2012.  We recently published an article on our M&A news blog with general guidelines for the new program (click here to view article). 

The main purpose of Act 32 is to streamline local earned income tax and make the process more efficient.  In doing so, Act 32 will require every employer to withhold the correct rate from every employee who works in Pennsylvania and remit the tax to the proper jurisdiction.  The correct rate is determined by taking the higher of: 1) the jurisdiction nonresident rate where the business employer is located (the location where the particular employee works), or 2) the jurisdiction resident rate where the employee resides (is domiciled).  Typically, the rate where the employee resides will be higher than the nonresident rate of the employer’s location, because a number of jurisdictions’ nonresident rates are only 1%. 

So how will Act 32 specifically affect contractors?  Many contractors have employees on different job sites for a given period of time.   There are a few different issues to consider when determining the correct jurisdiction and rate to withhold: 

• First, if the employee is working at a jobsite that has a temporary trailer and job orders are also given from the trailer, the employer location in this case is considered to be the jobsite of the trailer regardless of the length of assignment for the employee. 

 

• Second, if the employee is at a jobsite that does not have a trailer and the job orders are given from the main office located in a different jurisdiction, it depends how long the employee is working at this jobsite.  If the job assignment is for three continuous months or longer, the jurisdiction is the worksite location.  If the assignment is for less than three months, the jurisdiction will be the location of the main office.   A potential issue could exist with localities if delays occur during a job where an employee has to remain on site longer than three months when initially it was anticipated that the assignment would be less than 3 months.

 

• Lastly, if the employee is assigned to a worksite in Philadelphia, the Philadelphia wage tax should be withheld in lieu of local earned income tax regardless of the length of the assignment.

 

For the situations described above where withholding is required for multiple jurisdictions, the employee must provide the employer with a properly completed Residency Certificate for each location.  As with all Residency Certificates, the employer must keep these for its records and have them made available if requested by a locality.

 For more information, contact the construction professionals of McKonly and Asbury, LLP.

Bonus Depreciation and the Percentage-of-Completion Method of Accounting

On December 17, 2010, President Obama signed into law the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.”  One of the provisions in this act is to increase bonus depreciation from 50% to 100% for certain assets placed in service after September 8, 2010 and before January 1, 2012.  Another provision of this act is to extend the 50% bonus depreciation provision of the “Small Business Jobs Act of 2010” through December 31, 2012. 

In this article, we look at what bonus depreciation is, and consider the effects on large contractors subject to the percentage-of-completion rules under Internal Revenue Code § 460.

Bonus Depreciation

Most business assets placed in service after 1986 are generally depreciated for tax purposes using the Modified Accelerated Cost Recovery System (MACRS).  This method permits a certain percentage of the cost of an asset to be recovered over that asset’s estimated useful life.  The percentages tend to be weighted, with a higher percentage applied during the first years of an asset’s service—i.e., less depreciation is taken as the asset ages. 

For example, let’s consider an asset with a cost of $10,000 and with an estimated useful life of 5 years.  Let’s say that this asset was placed in service July 1, 2010 and that the applicable convention is half-year.  It is important to note that the convention under which an asset is depreciated can be either half-year or mid-quarter, and is determined by considering the amount of assets placed in service during the last three months of the tax year.  If this amount is at least 40% of the total assets placed in service during the year, then the mid-quarter convention (and the related depreciation percentages) applies.

IRS Will Delay to 2013 Its Rule On 3% Contractor Withholding

The U.S. Internal Revenue Service has approved a one-year delay—to Jan. 1, 2013—of a requirement that government agencies must withhold 3% of their payments to contractors. Design and construction groups oppose the mandate. The extension was published on May 9 in an IRS final rule and will apply to federal, state and local agencies' payments. The mandate, part of a 2006 statute, originally was to take effect at the start of 2011. The 2009 economic stimulus act extended the deadline until Jan. 1, 2012. The mandate applies to agencies whose total annual spending on goods and services is $100 million or more. Construction and other business groups have criticized the 3% requirement for holding up funds needed to complete projects and for increasing administration costs. Three bills are pending in Congress to repeal the mandate.

For more information on 3% contractor withholding rule, please contact the construction professionals at McKonly and Asbury, LLP.