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2018 Tax Filing Considerations for Contractors

By

Andrew F. Knutson - Tax Advisor St. Paul
Andy Knutson, CPA

For most contractors and construction-related businesses—particularly for those structured as pass-through entities—the 2018 tax season is anything but business as usual. With the Tax Cuts and Jobs Act (TCJA) on the books, there are several tax law changes that could impact your tax filing this year. Here are a few things to consider as you prepare your return.

Do you qualify for the qualified business income deduction?

One of the changes brought about by the TCJA was the qualified business income (QBI) deduction for pass-through entities, such as partnerships and S corporations. Only certain types of businesses qualify for the deduction; thankfully, most general contractors and subcontractors meet the requirements.

There are many phases to the calculation, but in general it is equal to 20 percent of the lesser of your flow-through business income or your taxable income. If a business owner’s taxable income exceeds $207,500 (or $415,000 if married filing jointly) you must also factor in wages paid by the company and the original cost of equipment and property owned by the business.  Please talk to your tax advisor about this deduction, as it is highly complicated and the rules surrounding it were only recently finalized.

If you do qualify for the 20 percent deduction, consider this: The TCJA also limited the state income tax deduction and eliminated the production deduction, both of which were approximately 9 percent deductions (for high-income Minnesota taxpayers). So, although 20 percent sounds really great, in reality it’s only a 2 percent sway.

Should you change your accounting method?

Thanks to the TCJA, businesses with less than an average of $25 million in annual revenue over the last three years can now file tax returns on a cash basis. Previously, the threshold was $10 million ($5 million for C corporations). So, if you are a $10-million-a-year contractor who has been “stuck” on the accrual method of accounting, you now have an option to switch to cash.

Will you make the switch? A decision about whether or not to change your accounting method should never be made in haste. There are pros and cons to both methods, so it’s important to talk to your tax advisor to determine which is best for your business.

One more thing: The new $25 million threshold also applies to the use of percentage of completion for long-term contracts. This means you could have additional options for how you account for these, too.   

Are you required to do a lookback interest calculation?

Tax Experts St. paul - Construction CPA St. Paul

Previously, businesses that had more than $10 million in average annual revenue over the prior three years were required to do a lookback interest calculation. Now, this threshold has increased to an average annual revenue of $25 million or more over the last three years. For many contractors, this provides even more of an incentive to be conservative in estimates, which is not only good practice but also desired by third-party users of financial statements.

Will you expense incidental inventory?

One of the new rules ushered in by the TCJA is the ability to elect to expense up to $2,500 of incidental inventory. If you make this election, it must be reflected on your internal books and records. The election may not be appropriate if you’re using GAAP financial statements.   

Partner with an expert to file your 2018 return.

When it comes to tax filings, much has changed since last year. It’s important to not only be aware of the new deductions, rules, and thresholds but also how they could impact your tax burden in 2018 and beyond. If you haven’t already, ask your tax advisor to help you understand your options, so you can make the right filing for your business.

How to Choose the Right Bonding Agent for Your Company

By

 Andrew F. Knutson

 By Andy Knutson, CPA

In the commercial construction industry, it’s common practice for project owners (typically public entities) or general contractors to request a construction surety bond to protect against contractor or subcontractor default. To secure a construction surety bond, the first step is to contact a bonding agent. A bonding agent serves as the middleman between you and the surety provider (i.e., the insurance company) to determine which type of surety will best meet your needs.

But not all bonding agents are created equal. How do you know you’re working with the right one? Here are five questions to help you determine if your bonding agent is a good fit.

Is your bonding agent your advocate?

 Your bonding agent should seek the best bond deal possible for you—one that’s appropriate for the circumstances of the project as well as your financial situation. This person should work hard to prove to the surety that your company will not fail on the project and to secure the best bond price. A good bonding agent will know what the market price is for the type of surety bond you need.

Also, be sure to find out if your bonding agent is truly independent or tied to certain insurance companies. If it’s the latter, that doesn’t necessarily mean the agent can’t advocate for you, but it’s wise to know this up front.

Does your bonding agent point out red flags on your financials?

 To determine whether or not to issue a construction surety bond, an insurance provider will examine a contractor’s working capital (current assets minus current liabilities) and equity. If your financial statements are inaccurate or formatted incorrectly, it could impact your bonding capacity or even your ability to secure a bond. But a knowledgeable bonding agent can help. Your agent should review your financial information and look for potential issues. If there are red flags, your agent should be able to connect you with an accountant who can help you clean up your statements.

Does your bonding agent prevent you from overspending on your financial reporting?Construction CPA St. Paul - Accounting Audit Firm St. Paul

 Depending on the type of surety you need, your agent may require a compilation, review, or audit of your financial statements. Of course, sureties would love it if every bond applicant was audited, but that’s not realistic! Your bonding agent should accurately match the level of reporting you provide with the level of bond you need.

Is your bonding agent active in the construction industry?

 Your bonding agent should not only specialize in construction surety bonds but also be aware of what’s happening within the industry. Look for a bonding agent who is an active member of construction industry associations. Your CPA may also be able to give you a referral.

What do your bonding agent’s references say?

 Yes, you can ask for references—and a stand-up agent will be more than happy to provide them. And don’t be shy when you call them up. In addition to general questions, be sure to ask if the agent is willing to go to bat for a client. The construction industry is a tough environment; you want a bonding agent who isn’t afraid to fight on your behalf.

While answering these five questions is a good place to start when selecting a bonding agent, there may be other insurance-related aspects to consider, too. Along with your accountant, a knowledgeable commercial insurance agent can help you better understand your options. If you have questions or would like to discuss this topic further, please don’t hesitate to give me a call.

4 Telltale Signs of an Inadequate Accounting System

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By Andy Knutson, CPA

As your business grows and evolves, you may change your space, equipment, and employees to keep up. But what about your accounting system? Although some companies may never outgrow a basic accounting system such as QuickBooks, others, particularly those in retail, manufacturing, and construction industries, may quickly find it lacking. This can lead to shoddy data, issues with timing, and poorly vetted decisions—none of which bode well for a growing business. Concerned? Here are four telltale signs of an inadequate accounting system.

  1. Your accounting needs are changing.

Have you added a product line? Expanded your operations to the point where you’re now dealing with inventory and work in process? Secured a backlog of projects? Opened an online store? Whereas a basic accounting system may have worked when your business was in its infancy, these types of shifts may require an upgrade. Yes, you may be able to cobble together other systems to make your original system work; however, this is almost always a temporary solution that can also open the door for duplicate processes and costly errors. Instead, consider migrating to a robust system that handles all of your accounting needs on one platform.

  1. Your data entry doesn’t match your workflow.

Your accounting system should work for and not against you. If your data entry process isn’t lining up with your workflow, it may be time to find a better fit. Make sure the data is being entered while the work is being done and not recreated after the fact! Time report data should be flowing into your system electronically from your employees as they log in and out; it shouldn’t be entered manually at the end of the pay period. The same is true for inventory transactions and equipment usage.

  1. You aren’t getting the reporting detail you need.

While a basic accounting system will provide some level of detail in its reports, your business may require more. Many accounting systems offer the ability to drill down into certain line items by job or division. You could also allocate indirect expenses in order to view true job performance. These are the kinds of details that can help you pinpoint issues and grow your business while also increasing profits (unfortunately, they don’t always go together).

  1. You don’t trust your accounting system.

You should be able to wholeheartedly rely on the information provided by your accounting system. If you’re not, it could be time for a change. But first, consider this: your accounting system is only as good as the data going into it. Before you seek out a new system, give your internal processes a thorough review.

One final thought: Like any software, your accounting system won’t solve problems by itself. As a tool in your business-owner tool belt, it needs to be wielded properly. As you weigh a change in your accounting system, make sure you have the right people involved—and the right buy-in from your staff. Don’t hesitate to give our accounting firm a call if you have questions or would like guidance as you navigate this important decision.

Improve Your Internal Controls For a Better Year Ahead

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By Andy Knutson, CPA

business tax consultants

Internal controls are best defined as the policies and procedures an organization employs to create value and minimize fraud risk. They are critical not only for fraud prevention but also for accurate financial reporting. For these reasons, business owners must be careful to avoid complacency. Even if your controls seem to be sound, there’s always room for improvement.

Here are four ways to improve your internal controls:

  1. Better segregation of duties.

This is a big one, and it’s an easy place to start. Segregating duties allows for double verification. In other words, it prevents a scenario where an employee has unchecked authority. Every process should have at least one review. For instance, if your bookkeeper cuts the accounts payable checks, you (as the owner) or another trusted partner should verify each check for accuracy. With this double verification in place, you have a better chance of catching things such as payment to unapproved vendors, double billing, or unauthorized billing rates. Also, think about the people who currently perform controls—is this still the best use of their time?

  1. Review software privileges.

As more and more processes become electronic, controls over your software platforms are becoming increasingly important. Consider who has access to what modules. As employee roles change, should their software access follow suit?

  1. Revisit inventory counts and pricing.

As your company grows, the frequency at which you count inventory may need to increase. For example, an annual count may have been appropriate when revenues were at $500,000, but now that they’ve doubled you may need spot checks throughout the year. In addition to the frequency of counts, think about pricing: Who’s approving the price of inventory? Should this role change?

  1. Conduct a fixed asset review.

Controls over fixed assets such as vehicles can be easily overlooked. A review or inventory of fixed assets can verify their existence and also serve as a way to strategize maintenance and/or replacement.

Start off the new year with the right fraud controls in place.

Taking steps to improve your internal controls now sets you up for a strong start in the year ahead. This is particularly important if you are looking to sell, transfer ownership, or bring in investors. Prospective buyers and investors will want to see internal controls, as they indicate a business in good standing. You can also expect your internal controls to be scrutinized during an annual audit.

If you’re unsure of how to improve your company’s internal controls, talk to your JAK accountant. We often help clients with designing and improving their controls, and are happy to help you strengthen yours.

How to Build a Rock-Star Internal Accounting Team

By

By Andy Knutson, CPA

 As a business owner, you depend heavily on your internal accounting staff. These are the people, after all, who keep you up to speed on the financial side of your operatioAccounting Team Logons—i.e., the information you need to make critical business decisions. When this team isn’t on top of its game, you feel it. Sometimes right down to your bottom line.

There are countless reasons why your accounting team may not be hitting its stride. Maybe the growth of your business is outpacing its capabilities. Perhaps key team members have retired or left, causing their responsibilities to be reshuffled amongst less experienced individuals. Or, it could be a combination of factors. Whatever the reason, you can’t afford to brush it off and hope things improve.

So, how do you ensure your internal accounting team—we’re talking bookkeepers, accounts receivable/payable, controllers, etc.—can deliver? We hope these three steps will give you a good place to start.

  1. Assess your current staff situation

 If your internal accounting department is consistently behind in providing you with information, your natural response may be “we need more boots on the ground!” But this isn’t always the case. Could roles be reshuffled to fill gaps? Would your staff benefit from general accounting and/or software-specific training? Are you using the best accounting software for your business? Asking questions like these can help you pinpoint your real needs.

  1. Envision the position—and person—you need

If you’ve concluded that you do, in fact, need to add or replace an internal accounting team member, start with a job description—based on the needs you uncovered while assessing your current staff. This will help you hone in on the type of person you need to hire. For instance, are you looking for someone who can perform data entry for now but is willing to take on additional responsibilities in the future? If so, perhaps you should seek out a recent college grad.

If you’re looking to hire a CFO or controller, the type of person you recruit will likely depend on what you’re willing to pay. A higher pay scale will typically attract someone who is experienced and ready to take charge. If you’re paying on the lower end of the wage scale, you may want to look for someone who has been, say, a bookkeeper for a long time and is ready to take the next step.

  1. Consult with your accounting firm

Yes, really! Your accounting firm can be a helpful resource in evaluating candidates. At JAK, we have helped clients sort through resumes and have even sat in on interviews. We speak the language, so we can ask the right questions to find the right fit for your team.

You deserve a rock-star internal accounting team!

 The success of your business relies on the health of your financial information. If you’re noticing gaps in your internal accounting functions, don’t wait to address the issue. Reconfiguring or adding staff to your team is an investment your growing business won’t regret.

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John A. Knutson & Co., PLLP

John A. Knutson & Co., PLLP, (JAK) is a Twin Cities-based accounting firm serving clients throughout Minnesota and beyond. A Team Committed to Quality Beyond Expectations