Contractors Center Point

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.

Construction Backlog Up 10 Percent In Second Quarter

Associated Builders and Contractors (ABC) reported August 16th that its Construction Backlog Indicator (CBI) increased 10 percent in the second quarter of 2011 to an average of 8.1 months, up from 7.3 months the previous quarter. The CBI is 12 percent higher than one year ago. CBI is a forward-looking indicator that measures the amount of construction work under contract to be completed in the future.

Regional Highlights

• The South continued to report the lengthiest construction backlog of any major region, with project orders rising 1.87 months during the second quarter compared to one year ago.
• Construction backlog in the Middle States continued to expand, growing by .25 months, or an 11.8 percent increase from the second quarter of 2010.
• The Northeast reported the smallest construction backlog increase of .04 months from the same period last year.
• The West experienced a modest construction backlog increase of .61 months from one year ago.


CBI Map of Regions Second Quarter 2010 versus Second Quarter 2011

 

 

 

 

 

 

 

 

 

 

 

Industry Highlights

• The quarterly increase in construction backlog was fueled by only one of three major industry segments monitored by ABC – the commercial/institutional building sector – in which backlog rose from 7.3 months in the first quarter of 2011 to 8.6 months in the second quarter.
• Backlog in the infrastructure category has declined for four consecutive quarters, likely the result of the steady decrease in the impact of the stimulus package enacted in February 2009.
• Construction backlog in the heavy industrial category declined 18 percent during the second quarter following three quarters of stable activity.

Highlights by Company Size

• During the second quarter of 2011, construction backlog rose for all categories of firm size with the exception of those with revenue exceeding $100 million.
• Average construction backlog was highest at 9.8 months among firms with revenues between $50 million and $100 million.
• Smaller firms are now experiencing meaningful increases in construction backlog, with average backlog rising from 6.4 months to 7.5 months during the second quarter among firms with revenue of less than $30 million.

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

 

 

 

June Construction Spending Hits Six-Month High

U.S. construction spending unexpectedly rose in June to touch a six-month high as an increase in private outlays offset a drop to a four-year low in public spending, a government report showed on August 8th.

Construction spending advanced 0.2 percent to an annual rate of $772.32 billion, the Commerce Department said. May's construction spending was revised to a 0.3 percent increase rather than the previously reported 0.6 percent decline.

Economists polled by Reuters had expected construction spending to be flat in June.

Overall construction spending fell 4.7 percent from a year ago.

Private construction spending rose 0.8 percent to a seven-month high as an increase in nonresidential outlays offset a second straight month of declines in spending on residential projects.

Spending on public construction projects dropped 0.7 percent to $278.91 billion, the lowest level since March 2007. The decline reflected weak spending on federal projects, which dropped 2.2 percent. State and local government spending fell 0.6 percent to the lowest level since November 2006.

To learn more about McKonly and Asbury, LLP and its construction practice, please contact our construction professionals.

Failure to Address Infrastructure Needs Will Cost Businesses $430 Billion, ASCE Reports

The nation’s deteriorating surface transportation infrastructure will cost the U.S. economy more than 870,000 jobs and suppress the growth of the country’s Gross Domestic Product by $3.1 trillion by 2020, according to an American Society of Civil Engineers report released July 27. The report showed that in 2010, deficiencies in America’s roads, bridges and transit systems cost American households and businesses more than $129 billion, including about $97 billion in vehicle operating costs, $32 billion in delays in travel time, $1.2 billion in safety costs and $590 million in environmental costs. If investments in surface transportation infrastructure are not made soon, ASCE said, those costs are expected to grow exponentially. Within 10 years, U.S. businesses would pay an added $430 billion in transportation costs, and it will cost firms more to ship goods, and the raw materials they buy will cost more due to increased transportation costs. “The link between a nation’s infrastructure and its economic competitiveness has always been understood,” said Kathy J. Caldwell, ASCE president, “but today, for the first time, we have data showing how much failing to invest in our surface transportation system can negatively impact job growth and family budgets. This report is a wake-up call for policymakers because it shows that investing in infrastructure contributes to creating jobs, while failing to do so hurts main street America.” The report was conducted for ASCE by the Economic Development Research Group of Boston. For more information, visit www.asce.org.

Understanding Fiduciary Responsibility in an Employee Benefit Plan

Having an employee benefit plan (EBP) can be a crucial aspect of attracting top talent as part of an organization’s benefit package.  Participants in plans such as 401(k)’s can reap the benefits of potential employer matching contributions as they try to pad their savings for retirement.  However, it is not to be overlooked that EBP’s also require a great deal of diligence on the part of the plan sponsor in maintaining fiduciary responsibility.  There are strict regulations stemming directly from the IRS and Department of Labor (DOL), and noncompliance can lead to serious consequences.

A fiduciary is essentially any party who can exhibit control and make decisions in some manner relating to the plan.  This can include many different parties, which will vary based on the organization and the plan, but the plan administrator, custodian, and trustee are generally the most prominent.  Fiduciary responsibility begins with an understanding of the roles and responsibilities of the plan sponsor.  The plan sponsor needs to adhere to their ownership of the plan, and the responsibility to ensure proper administration and regulatory compliance that comes with the ownership.  This aspect can tend to be violated when a plan sponsor tries to push responsibilities to a custodian or trustee or fails to keep up with changing regulations.

Similar to other areas of a company’s business, internal controls are also an integral part of an EBP.  It is the plan sponsor’s responsibility to design and maintain effective internal control practices to help identify errors and minimize the possibility of fraud from occurring.  An effective internal control system will ultimately minimize the risk associated with the plan and help ensure that participant’s funds are being handled properly.  Adherence with these aspects of fiduciary responsibility will ultimately point a plan in the right direction towards compliance with IRS and DOL regulations.