Tax Reform in the Construction Industry

Tax Reform is a Reality: What Construction Companies Need to Know

The first major legislative victory on behalf of President Trump, and the first major accomplishment since the appointment of Supreme Court Justice Gorsuch, and the largest tax reform package in over 30 years, the Tax Cuts and Jobs Act was finalized by Legislators on December 20, 2017 and was signed into law just days later.

While the bill will save money for nearly everyone (outside of high-income earners in high income tax states—due to the removal of the SALT deductions), the bill will create opportunities for a great deal of Americans and American employers. Today, we would like to discuss some of the important caveats and cutouts that affect the construction industry.

Six Things Construction Companies Need to Know about the Tax Cuts and Jobs Act

The construction industry is one of the many beneficiaries of the tax bill, set to reduce corporate tax rates, increase pass-through deductions, and make the United States more competitive in the global economy. Below, we would like to address some of the biggest benefits (and a few of the challenges) that will result from the new tax code.

Reduction in the Corporate Rate

One of the most prominent changes in the new tax code is the massive reduction in the corporate tax rate from 35% (the highest in the industrialized world) to a more competitive 21%. Construction companies, many of whom face cash flow challenges day in and day out, stand to benefit from keeping more of their own money.

Repeal of the Alternative Minimum Tax

Under current law, the Corporate Alternative Minimum Tax is 20%, with an exemption up to $40,000, and corporations averaging less than $7.5 million in gross receipts over the past 3 years were exempt.  Under the new law, the corporate alternative minimum tax is repealed.

The repeal of the AMT is hugely important for all corporations, especially those in the construction industry, as it removes a complex yet necessary process from the bookkeeping process. Under current law, the AMT required companies to essentially keep two sets of books making it both costly and paperwork-heavy. The new tax code will make life easier for accountants, bookkeepers, and business leaders at construction firms.

Section 179 Equipment Expensing

If there is one thing that will be advantageous for construction firms looking to purchase business equipment over the next five years, it will be the expansion of Section 179 equipment expensing—now doubled from $500,000 to $1 Million. There are two ways to look at this.

First, by doubling the amount that can be expensed, it will encourage investment in machinery and other equipment at construction firms. It will also reduce the hassles of depreciating an item over five, six, ten years, or eighteen years. However, there is huge value in expensing everything you can in 2017. With the corporate tax rates dropping in 2018, you will benefit from reducing your taxable income as much as possibly this year. We recommend expensing anything you can in 2017 to maximize your benefit.

Pass-Through Entity Tax Relief

Many construction companies exist as pass-through entities, and the new bill will allow them to keep more money. Now, sole proprietorships, partnerships, LLCs and S-corporations in architecture, engineering, and construction have been recognized for their role in building America, and will receive their reward for this role.

In the early versions of the bill, architects, engineers, doctors, lawyers, financial services firms and numerous other types of businesses were grouped together and excluded from the deduction. However, a redraft made a compromise for engineers and architects (including construction firms), recognizing their “integral role in facilitating capital investment” and ultimately qualifying them for the pass-through benefit.

Starting in 2018, Pass through entities (S-Corps / Partnerships) except for service entities will receive a 20% deduction on qualified income, subject to the greater of 50% of W-2 wages paid or 25% of W-2 wages paid and 2.5% of property placed in service.

Potential Challenges: Higher Interest, Increased Talent Demands, Lower Homeowner Demand

For some construction firms, the tax bill may not be 100% sunny. Raymond Torto, head of Raymond Torto Commercial Real Estate Advisory Services, believes that a tax cut during full employment could be too much of a good thing, ultimately leading to capacity strain and inflation. “Commercial real estate will suffer higher interest rates with steady demand—a good outlook if debt is not excessive for the asset class.”

Additionally, the new tax bill could pose challenges for realtors—and in turn, those in residential (single- and multi-family) construction. By doubling the standard deduction and reducing the mortgage interest rate deduction, the legislation blunts the benefit of the mortgage interest deduction—one of the key factors in the home-buying decision.

Forging Ahead: Construction Industry’s Future under the New Tax Plan

In 2017, Construction is one of the most heavily-taxed industries in the United States—second only to the retail industry in effective tax rates at 28.7%, and stands to benefit from this bill. While the new tax plan hasn’t made strides to cut spending and tackle the long term sustainability of the United States fiscal future, this has been a much-needed break for companies across the United States. As you forge ahead into the coming years, we would love to help.

In 2017, rinehimerbaker launched its construction-focused accounting technology practice, designed to help construction companies simplify their accounting, save time and money, and grow their business.

By working with one of the most trusted names in construction accounting software—Sage—we are proudly helping construction firms to find their way into the cloud with Sage Intacct—a best-in-class cloud ERP designed to help you increase project profitability and visibility. Contact us to learn more.

Trade Contractor Accounting Challenges

Three Financial Time Drains for Trade Contractors

There are over 10 million trade service contractors, and while some operate as single independent contractors, many others operate in a larger business unit, with large-scale time management, purchasing, and accounting needs, run either by a business manager or staff who needs to manage purchasing, labor, billing and more.

Whether you’re in the business of electrical work, plumbing, HVAC services, data networking, roofing, painting, carpentry, sheet metal, or one of the many other trades, your industry faces some unique back office challenges.

With this in mind, one of the biggest concerns is likely this: You’re doing more and more work each month, and expected to get it done in the same amount of time. While you used to be making or supporting decisions that positioned your company for growth, nowadays you’re struggling to just complete the basics. In essence, you’re working in your business, not working on it.

Working in vs. Working on Your Trade Contractor Business

For an accounting professional, manager, or other business leader at a trade contractor, working in your business is simple: spending your day completing the necessary tasks in line with your job description.

However, when you’re working on your business, you’re getting all of the necessary tasks done, but also doing work to improve the business. This could include anything from highlighting opportunities for purchasing to save money, finding new opportunities for the project department to improve efficiency, or even finding ways to generate new business. Simply put, working on your business is where the money is made.

Unfortunately, one of the problems that trade contractors face is that leaders constantly get caught up in the minutiae of the daily grind and lose sight of the big picture. With rare exceptions, the people at a business want to help said business grow, but they often lack the processes or technology to do so.

If you really want to start focusing on the big picture, you need to take a step back, look at your everyday tasks, and look for certain things you can automate, so you to get back to working on your business.

Three Necessary Time Drains Preventing You from Working On Your Business

While the trade may differ, the process of accounting for it is relatively similar, and if you’re like most, you waste away on manual processes surrounding one or more of the following tasks.

Contracts, Completion, and Revenue Recognition

Much of your work is based in contracts, and whether you’re looking at the current way of doing business (PCM/CCM) or the ones about to take hold (performance obligation), bringing everything together poses challenges and creates a lot of work.

If the current method seems laborious, the new standards about to take hold will create a new set of challenges, as the contractor task force has been among the most vocal of the AICPA working groups who have noted implementation challenges. For businesses with outdated, manual processes, this means you will be doing a lot more work transitioning to the new standard and managing contracts under it.

The Cure: Technology Designed with ASC 606 in Mind

Revenue Recognition for trade contractor organizations can be a complex series of decisions and paperwork—both under the new and old standard. However, with major changes on the horizon, having plans, processes, and technology in place can be the first step in a successful transition to new standards. Sage Intacct was built to make contract management under the new standard simple, handling the complex requirements and providing peace of mind for accounting and project teams.

Learn more about the new standard and how Sage Intacct is ready to tackle the challenges it presents here.

Project Cost and Profitability Tracking

You have to answer a lot of questions on a daily basis. Will this job be completed on time? On budget? Do we have the people to take this job on this date?

Back-office professionals at trade contractors need to be able to answer these questions quickly, efficiently, and accurately. If your answer to any of these questions was “I don’t know” or “let me get back to you,” you don’t have a complete picture of your business. You need to have a complete view of each project—from materials to labor—before, during, and after the project. More importantly, it’s vital that you can come up with answers to these questions quickly.

The Cure: Speed through Automation, Visibility Through Dashboards and More

By automating your processes and setting up dashboards, you can receive and present information quickly, clearly, and compellingly—when and where you need to present it. Sage Intacct offers the right project insight when and where you need it. Whether in the form of dashboards, analytics, or project accounting-focused design, Sage Intacct can handle anything a finance team at a trade contractor can throw at it.

Cash Flow

Just as you need to look at projects before, during, and after, you need to be able to present a cash flow statement for both these projects and for the organization as a whole. This is the job not only of the back office, but of the project manager as well, who needs to be able to accurately present a schedule of values.

Financially savvy companies use standardized processes to ensure that the ability to be cash flow positive exists earlier in the project. PMs need to understand that their goal is to define a revenue recognition strategy that ensures a good cash position for their projects.

The Cure: Anytime, Anywhere Access for Those Who Need It Most

To make this happen, trade contractors need to combine automation with mobility, allowing project managers to access the numbers, submit costs, mark up the costs based on predetermined standards, and get all of this to billing—whenever and wherever. However, thanks to the cloud, providing access to the people who need it is easier than ever. Sage Intacct was recently recognized for its cash management function. Learn more about the feature and how it can make everything from billing to planning easier here.

The Challenges in Accounting for Trade Contractors Don’t Stop There

These are just a few of the time drains that finance and accounting professionals at trade contractors face every day, month, quarter, or year. However, by taking steps to increase automation, mobility, and reporting, the jobs mentioned above can be completed in less time, so you can get back to working on your business.

Sage Intacct provides the automation, reporting capabilities, and analytics you need to make decisions and prepare for the road ahead. Whether you need to manage a team of 10, 100, or 1,000 contractors, Sage Intacct can grow with you, working with other technology you need to manage your business.