Year-End Planning Strategies for Contractors
Now is the time to consider tax strategies and
Backlog
financial statement performance for the fiscal year-end.
When developing a strategy, analyze how the strategy
will impact your company in terms of your tax
liabilities, flow-through income to your owners, and
financial statement strength for year-end reporting.
Always check a potential tax position against your
financial covenants and key performance ratios your
financial statement users consider with the year-end
financial statements.
Here are several considerations when developing
your year-end tax and financial statement strategy:
Cash
Any strategy should focus on maximizing the
company’s cash reserves at the end of the year.
When circumstances allow for it, consider
requesting early payment from customers with large
A/R balances and delaying cash disbursements for
payables until after year-end. Collect retention
balances whenever possible. Delay large purchases or
capital investment if necessary, or use debt financing to
maintain liquidity ratios.
Accounts Receivable
Review the accounts receivable listing prior to yearend, paying particular attention to balances outstanding
over 90 days. Focus efforts on collecting these
amounts prior to year- end. Balances over 90 days are
generally discounted heavily by financial statement
users and can even be excluded in covenant
calculations.
Retention Receivable
Review the retention listing for retention due on
completed contracts. Determine the action items that
need to be completed before you can collect the
retention and focus on getting those done. Submit all
necessary paperwork including the execution of a
conditional final lien release.
Job Schedules
Thoroughly analyze WIP schedules to ensure that the
estimated costs to complete and estimated gross profit
are accurate, given all known information. If negative
variances become a trend, it could indicate poor
estimating and job cost forecasting, so be skeptical and
revisit prior year-end adjustments. Negatively trending
WIP can result in users of the financial statements
losing confidence in the company’s ability to estimate
jobs accurately.
Focus on turning awarded work into contracted work.
A signed contract is typically required under GAAP
to include a project in the company’s backlog
disclosure at year-end.
Fixed Assets
The Section 179 fixed asset deduction continues to be
an attractive tax strategy for contractors. As it
currently stands, companies can expense up to
$500,000 under Section 179 on qualifying fixed asset
purchases, subject to income limitations and phaseout beginning at $2 million of fixed asset
acquisitions. Additionally, the bonus depreciation
deduction allows companies to take 50% bonus
depreciation on qualifying “new” fixed assets
purchased during 2016.
We also recommend a thorough review of your
fixed asset listing to ensure you are not paying
personal property taxes on equipment no longer owned
by the company.
Research and Development Opportunities
The research and development tax credit is a
government- endorsed tax incentive that rewards
companies for using research and development to
improve their processes. Construction, design and
architecture firms are generally eligible for this credit if
specific requirements are satisfied. The credit was made
permanent as part of the Protecting Americans from
Tax Hikes Act of 2015. Also in 2016 and in future
years the R&D credit can be used to offset AMT tax
liabilities for businesses with average revenue under
$50 million.
Energy Incentives
Another popular deduction is the Section 179D energy
efficient building deduction. This deduction can be as
high as $1.80 per square foot for energy efficient
commercial buildings placed in service or remodeled
from 2006 to 2016. If a qualifying building is
constructed on property owned by a federal, state or
local government, a contractor who is the designer on
the project may be entitled to the deduction. Also,
check with your state and utility districts as they may
offer additional credits for energy savings. Currently,
Berntson Porter is monitoring efforts to extend the
179D energy efficient building deduction beyond 2016.
GAAP Accounting Changes
There are two major accounting updates on the
horizon: Lease Accounting and Revenue
Recognition. Familiarize yourself with the standards
and consider how the changes will affect the
company and how you can tackle any challenges
head-on.
Other items to consider in your year-end tax and
financial statement planning include state income tax
planning, maximizing retirement plan contributions
for the company’s owner group, and reviewing
insurance coverage, including life insurance
considerations, and succession planning.
The implementation of these strategies will benefit
your company’s year-end financial position and tax
liabilities. Remember to always discuss your strategy
and expected outcomes with the users of the
financial statements prior to implementation.
Berntson Porter & Company, PLLC is ready to assist
you if you would like more information on these yearend strategies, as well as help identify strategies for
2016 and beyond.
Rhett Ennis, CPA, Assurance Services Senior
Manager. Rhett can be reached at 425.289.767628 or
[email protected].