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.

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.

Pennsylvania Issues Bulletin on Bonus Depreciation

Pennsylvania’s Department of Revenue issued a Corporation Tax Bulletin 2011-01 on February 24^th, 2011.  The Bulletin was issued to provide taxpayers and tax preparers guidance with regards to handling the 100% federal bonus depreciation for Pennsylvania Corporate Net Income Tax.  Pennsylvania is informing taxpayers that they will take the position that assets subject to the federal 100% bonus depreciation will be allowed to deduct these amounts for Pennsylvania purposes in the same year as federal.  Those assets subject to 100% bonus depreciation will not be included in Pennsylvania’s RCT-101, Schedule C – Adjustment for Bonus Depreciation.  The schedule will still be used for assets subject to the 30% and 50% bonus depreciation.  In addition, Pennsylvania also provided guidance that they allow the full recovery of 30% and 50% depreciation disallowed in previous years in the year in which a complete write-off of the assets occur for federal purposes.

The Construction Professionals at McKonly and Asbury, LLP will continue to provide updates on this issue as the issue moves forward during tax season.  If you have any questions or concerns, please feel free to contact the Construction Professionals of McKonly and Asbury, LLP.

Avoid an Audit Over Compensation

The IRS sometimes audits construction corporations over the salaries they pay shareholder-employees. In fact, this has been one of the IRS' favorite audit targets in recent years.

Compensation is fully deductible by a C corporation if it's considered "reasonable." But if a salary is considered too large, Uncle Sam can label part of the payments as "disguised dividends" and your business can be subject to double taxation.

How? When your corporation distributes profits as salaries, the firm gets a deduction for the amount. You have to pay personal income tax on the money, of course, but it's only taxed once.

However, if the corporation pays you a dividend, the money is taxed twice - once at the corporate level and again at the personal level on your Form 1040.

Here are two examples of corporations challenged by the IRS over compensation and the different results they receive

I Have to Do What?! A Look at Allocation of Costs for Long-Term Contracts

Internal Revenue Code § 460 is the regulatory authority that addresses long-term contract accounting for tax purposes. This code section is long and complicated, and the compliance rules can sometimes seem unreasonable. In this article, we'll take a look at one of the more ignored compliance issues: Allocation of G&A.

Under IRC § 460, percentage-of-completion method of accounting is required for any large construction contractor with contracts meeting the definition of "long-term". Specifically, this is determined by considering 1) if a contractor has average annual gross receipts for the past three years exceeding $10 million, and 2) if the contract will span over two or more tax periods. If both of these tests are met, and you don't meet the homebuilder exception, you have long-term contracts subject to percentage-of-completion.

The Rules of Cost Allocation

There are in fact one general rule and seven "special" rules for cost allocation under Treasury Regulation § 1.460-5. We aren't going to delve into each of these, instead opting to focus on the first one listed: the general rule. This requires that both direct and indirect costs be allocated to long-term contracts "in the same manner that direct and indirect costs are capitalized to property produced by a taxpayer under § 1.263A-1 (e) through (h)". In other words, both direct and certain indirect costs should be allocated to long-term contracts, as long as the expense is being incurred because of the contracts.