In all businesses everyone knows that cash is king. This is especially true in the construction industry. In the new reality of tight margins, high retainage percentages, and slow-paying contracts, every bit of cash a contractor can get their hands on can be vital to a company’s operations. The look-back calculation, which is required for many contractors, could put more cash into your pocket.

Who Must File a Look-back Calculation?

If a contractor is required by the IRS to report their long-term contracts under the “Percentage of Completion” method, then those contracts are subject to the look-back calculation.

What is the Look-back Calculation?

In simple terms, the look-back calculation is a calculation of additional interest that needs to be paid to (or refunded by) the IRS on taxes paid on contract revenue that has been recognized in prior years. It is calculated on a job-by-job basis, and then all over/under reporting is netted to determine if you are entitled to an interest refund or owe the IRS interest.

The look-back calculation compares the percentage of gross profit that was recognized in prior years to the actual gross profit percentage realized upon completion of the job. Based on that analysis, the calculation determines whether or not the gross profit for that particular job was “over” or “under” reported in prior years based on job cost estimates at the time of the tax filings. If gross profit was overstated in the past due to changes in estimates or job fade, then theoretically, income was overstated and too much tax was paid in the prior year and the taxpayer is entitled to have interest refunded to them on that excess tax.

In our experiences, we tend to see job fade as a contract progresses through its various life stages. Overly optimistic expectations, unexpected costs or ineffective management of jobs can occur, and that once gross profit estimate of 12% shrinks down to maybe 10%. Anytime you have job fade on a long-term contract, more than likely you will be entitled to an interest refund from the IRS. However, the opposite holds true as well. If you experience job gain and had under-reported profit in prior tax years, you may have to write a check to the IRS for the interest on that under-reporting.

As always with tax law, there are exceptions and various elections that relate to the look-back calculation. If you have any questions regarding “percentage of completion” or the look-back calculation, please do not hesitate to contact me.

by Anita Sherman, CPA and John Fisk |

There has been a lot of discussion recently about this proposed legislation. If you have an opinion, now is the time to share it with your senator and representative.

In an article entitled “Indiana: Where We’ve Been and Where We’re Headed,” Patrick Kiely, President of the Indiana Manufacturers Association, reflects on Indiana’s status as a non-right-to-work state. Including Indiana, there are 28 states “that allow labor unions to compel, as a condition of employment, individual employees to become union members or pay union fees in lieu of membership, regardless of whether or not that person wants to join a union.” This issue is at the forefront of conversation as the 2012 Indiana General Assembly reconvened on January 4^th.

Kiely’s position is that it should be the employee’s right to determine if he or she wants to join a union or support it monetarily. There are currently over 14,000 workers in Indiana who have been forced to pay “agency fees” to a union even though they have made the decision to not join the organization. He supports his stance with statistics which suggest right-to-work states perform superior to non-right-to-work states on an economic level. The growth in real per capita income in right-to-work states from 1977 to 2008 was 62.3% while only 52.8% in non-right-to-work states. Additionally, over the same time period, job growth in right-to-work states was 100% while only 56.5% in non-right-to-work states. Kiely and other supporters of the current legislation point to the loss of job opportunities as the root cause. Quoting his article, “Studies and testimony by major economic development assessment firms indicate that non-right-to-work states are losing anywhere from 35% to as high as 80% of prospects.” In his opinion, passing right-to-work legislation would level the playing field for Indiana and make it more competitive for economic development opportunities.[i]

Morton Marcus, an economist at the Indiana Economic Digest, does not share Kiely’s viewpoint. In his opinion piece “Right-to-work is the wrong way to go,” Marcus argues against changing Indiana’s status as a non-right-to-work state for a variety of reasons. For one, he believes it is unfair for non-dues paying workers to reap the benefits of union negotiations as these workers would essentially be freeloading. Secondly, Marcus questions the legitimacy of such economic growth statistics noted above which are relied upon as indicators Indiana is losing out on job prospects as a direct result of the current legislation. He writes, “This claim is based on questionable research and fallacious assumptions.” Lastly, he contends right-to-work is connected with “lower wages, fewer benefits and less employee influence over working conditions,” and overall, not in the best interest of the workers of Indiana.[ii]

Regardless of the outcome, the right-to-work conclusion is bound to have a significant impact on Indiana businesses and residents. Expect to see a steady stream of information on the subject for weeks to come.

The latest update from the 2012 Indiana General Assembly is the Indiana Senate committee voted 6-4 to send the bill to the full Senate and then the House committee voted 8-5 to send a similar bill to the full House.

[i] Kiely, Patrick J. "Indiana: Where We’ve Been and Where We’re Headed." Indiana Manufacturers Association. Dec. 2011. Web. 06 Jan. 2012.

[ii] Marcus, Morton J. "Right-to-work Is the Wrong Way to Go." Indiana Economic Digest 01 Jan. 2012.

Good governance sets the tone
There can be no accountability without governance. You must set in place the means and measures to keep your organization in compliance with all applicable laws, rules, and guiding principles.

Author and nonprofit expert Steven Ott describes a nonprofit’s governance as “a product of its purposes, people, resources, contracts, clients, boundaries, community coalitions and networks, and actions as prescribed (or prohibited) in its articles of incorporation and bylaws, state laws and codes, and the IRS codes and rules.”

When it comes to accountability and governance, the buck unquestionably stops with your board. Focus your board’s attention on carrying out your organization’s mission — not on process-oriented details best handled at the staff or committee level.

Finances play a key role
You should consider having annual independent audits that are presented to the finance or audit committee and ultimately the Board of Directors. If your nonprofit has no audit or finance committee, management should present internal financial statements to the board and review financial performance against approved budgets on at least a quarterly basis. In addition, your board should establish and regularly assess financial performance measurements that are open to public review.
Your organization must comply with all legally required reporting procedures — and certain financial practices that may apply to a specific activity. For example, you might need to provide key performance indicators or other reports linking operational results with financial information required by your major funders and contributors.

Programs act out your mission
As you carry out your initiatives, you must do so fairly and in the best interests of your constituents and community. Your status as a nonprofit means you are obligated to use your resources only toward your mission and to benefit the community that you serve. Programs should be evaluated accordingly.

Documents tell the story
Communication is a big part of accountability. Your annual report, for example, should explain your mission, activities, and results for the preceding year. The report also needs to provide financial data for the year and list board members, management, staff, and other key employees. Additionally, it is a good practice to list donors and contributors within your annual report.

You also should make available your nonprofit’s Form 990s for the previous three years, which will give your public a good overview of your organization’s exempt activities, finances, governance, compliance, and compensation methods.

Let them rest assured
Accountability established at the governance level, and transparency provided by audited financial statements and IRS Form 990, provide assurance to the public that your tax-exempt entity is operating with integrity and effectiveness as it meets its goals. Your board and staff are likely doing exemplary work to fulfill your mission — and this is something your public ought to know.

The IRS released the standard mileage rates for use in 2012. Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

Business use of an automobile remains at 55½ cents per mile. For medical or moving expenses, it is 23 cents per mile (a half-cent decrease from the second half of 2011). For services to charitable organizations, the rate (which is set by statute) is 14 cents per mile.

Rather than using the standard mileage rates, taxpayers may instead use their actual costs if they maintain adequate records and can substantiate their expenses. The rules for substantiating these amounts appear in Rev. Proc. 2010-51.

For automobiles a taxpayer uses for business purposes, the portion of the business standard mileage rate treated as depreciation is 23 cents per mile for 2012 (it was 22 cents per mile for 2011).

by Brandon Cook, CPA | Partner, Tax Services Group

The way things are now: Under a tax law passed last year, the usual 6.2 percent OASDI rate for employees was reduced by 2 percent. A comparable tax break is available to self-employed individuals. However, employers aren’t eligible for any reduction. For employers, the 6.2 percent OASDI tax rate continues to apply to amounts up to the wage base. The Medicare rate of 1.45% for employees, and 1.45% for employers continues to apply to all earnings, without a cap.

The amount an employee saved in 2011 depended on the amount of his or her wages. For example, a worker earning $50,000 saved $1,000 (2 percent of $50,000) for the year. Someone earning $100,000 saved $2,000 (2 percent of $100,000). The maximum savings was $2,136 (2 percent of $106,800).

The payroll tax cut reduction was supposed to be in effect for 2011 only. But toward the end of the year, lawmakers began arguing about extending it for another full year. Political bickering ensued about how to finance the tax cut — through a new tax on wealthy Americans or through spending cuts.

On December 23, finally Congress passed a law extending the payroll tax cut through the end of February. The law is aptly named the Temporary Payroll Tax Cut Continuation Act of 2011.

Congress Will Revisit the Issue Soon. Therefore, if the tax holiday is going to last throughout 2012, Congress will have to take up the issue again when they get back to Washington after the holidays. Absent any new legislation, the OASDI tax rate for employees will revert to the 6.2 percent level on March 1, 2012 on wages up to $110,100. This is also the due date for solving the deficit reduction problem.

So be aware that payroll tax withholding could still change in March.

Isn’t It Ironic?

Isn’t it ironic that everyone is concerned about the future bankruptcy of social security, and this is where the tax cut is being applied?

Hans Michael Hurdle of PNC Bank, noted that we are experiencing a 60 year low in 10 year Treasury yields. In order to stimulate the economy, the Fed has been able to keep interest rates artificially low. Hans believes that as our economy continues to gradually improve, and if there is a Europe resolution, interest rates will pop up. There may be a 3 to 12 month window in which to take advantage of the current low rates. The market consensus is that LIBOR rates will increase over the next 5-6 years, and LIBOR is the basis used by most banks to determine their pricing.

We know that three or four years ago, it seemed as though rates were low and could only go up. A number of companies did employ swap arrangements, and in hindsight wished they had not. One way many of them mitigated this somewhat was to hedge 50% of the loan. At this point however, you need to ask yourself what the greater risk is-that rates could go lower, or they could go higher? We think it is time to take a longer term view. We encourage you to begin a dialogue with your banker about this. Have them do an analysis of your situation and discuss the pros and cons of hedging your interest rate risk.

There are two primary reasons you would not want to lock in your rates in the near future:

1. You do not believe that interest rates will go up much over the next 5 years, or
2. You are uncomfortable locking into your present banking situation.

Above all, remember this, doing nothing is, in this situation, making a decision. You want it to be the right decision, and the only way to make a good decision is to have the information and knowledge to do so. We encourage you to initiate that dialogue with your banker. We’d be happy to participate in that discussion at no cost to you.

Back on November 21, President Obama signed into law P.L. 112-56, “3% Withholding Repeal and Job Creation Act”. Back in 2005, Congress passed a law that would require federal, state, and local governments to withhold 3% from payments made to entities providing services or goods to those governments. Since then Congress has pushed back the start date of the withholding requirement with the updated date for payments made after 2011. This latest law has totally repealed the withholding requirement.

The second part of this new law creates an enhanced work opportunity tax credit (WOTC) for hiring qualified veterans. Employers (for-profit) have long been able to receive a credit for hiring employees who are members of certain targeted groups – ex-felons, food stamp recipients, SSI recipients, long-term family assistance recipients and certain veterans are just a few of the targeted groups. Currently, the WOTC is set to expire on 12/31/11. This latest law extends some of the WOTC, but only for hiring qualified veterans. This latest law will also apply to tax-exempt employers.

This credit will apply to qualified veterans who begin work before 1/1/2013, but after 11/21/11 (date signed into law). A qualified veteran is a veteran who is certified by a designated local agency that falls into 1 of 4 categories. If a veteran,

1) is a member of a family receiving assistance under a food stamp program for at least 3 months, all or part of which is during the 12-month period ending on the hiring date;

2) is entitled to compensation for a service-connected disability and has a hiring date that isn’t more than a year after being discharged or released from active duty or has unemployment time that is 6 months or longer during the 1-year period ending on the hiring date;

3) has unemployment time of more than 4 weeks, but less than 6 months during the 1-year period ending on the hiring date; or

4) has unemployment time of 6 months or more during the 1-year period ending on the hiring date.

The maximum credit an employer can receive ranges between $2,400 and $9,600. The credit is calculated based on hours worked, the wages paid to the qualifying veteran, and the category the veteran falls into (described above).

For a tax-exempt employer, the credit will apply against the social security tax the employer would pay on wages. The maximum credit amount is reduced down to a maximum of $1,560 – $6,240. The calculation is also based on the hours worked and designated category.

If you have any questions regarding the repeal or calculating the credit please contact the Greenwalt CPAs, Inc. Tax Services Group at 317-241-2999.

The Social Security Administration (SSA) recently announced cost-of-living adjustments (COLAs) for 2012. The purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not drained by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. If there is no increase, there can be no COLA.

The CPI-W is determined by the Bureau of Labor Statistics in the Department of Labor. By law, it is the official measure used by the Social Security Administration to calculate COLAs.

In 2009, 2010, and 2011, the increase was not sufficient to trigger an increase in the maximum contribution. However, for 2012, there are some increases, and these increases are important for those who like to maximize their savings and decrease their income tax bill.

For 2012, following are the annual contribution limits for some popular retirement savings vehicles:

• 401(k)s, 403(b)s, most 457 plans, Thrift Savings Plan (TSP) – $17,000 with an additional $5,500 catch-up contribution allowed for those 50 or older. (2012 COLA: $500.)
• Traditional & Roth IRAs – $5,000 with an additional $1,000 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)
• Simple IRAs – $11,500 with an additional $2,500 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)
• SEP IRAs – $50,000 or 25% of an employee’s compensation, whichever is lesser. (2012 COLA: $1,000.)
• 415(b) defined benefit plans – the limitation on annual benefits under a defined benefit plan is increased to $200,000. (2012 COLA: $5,000.)

Other increases that employers should note: When it comes to defining “key employees” in a top-heavy plan, the determination limit goes up $5,000 to $165,000 in 2012. Also, the Social Security taxable wage base increases to $110,100 from $106,800 next year.

Many contractors equate success to winning bids. While that certainly is partially true, there are several other factors which determine how successful the bidding process really is. As of late, many contractors are putting less markup in their bids in order to be more competitive and to increase their chances of winning the work. Others are struggling to win bids so they are expanding their geographic boundaries or bidding on types of work that they have not successfully completed in the past. Whatever your construction company is doing to win bids, we hope it has contributed to your company’s profitability.

Construction companies do have to bid work–there is no question about that. Given that, what determines whether the contractor is being successful in their bidding process? The tracking of bid-hit ratios, if calculated and analyzed, can be a tool to determine a contractor’s bidding success. In order to bid jobs, staff, (and many times the owners) spend time learning about the project, getting plans, sitting in meetings and preparing estimates. All of this takes time, which costs the company money. To make sure that the time and efforts are not wasted, tracking the bid-hit ratio is a useful tool. If you bid on 8 jobs and get 1 of them, then your bid-hit ratio would be 8:1. Depending on your company’s job size, this ratio may be most useful when tracked monthly, quarterly or annually to determine how the bidding success is going.

To better understand the bid-hit ratio, it can be broken down into job types, public vs. private, profit margin estimated, person that prepared the estimate, and/or contract size. This can provide a further understanding of where the company has success in winning jobs and where it may be best to focus efforts in the future. You could learn that there are certain types of projects that are never won, and therefore it may not be worth spending the time bidding them in the future. You may find a certain “sweet spot” in your bidding opportunities and continue to focus efforts on those types of jobs. The key to the bid-hit ratio is that the lower it is, the better.

Just because you have a great bid-hit ratio does not mean your construction company will be successful. Once completed, job profitability should be added to the analysis to ensure that the bids are not simply being won because there is not enough profit built into them. Other factors that can be analyzed may include the project manager and the length of the contract. For further analysis, bid spreads on public work can be tracked to determine how much a contract was won or lost by.
Although many owners do not feel they have time to analyze the company’s bidding success and track it all the way through the completed contract, such information obtained can be useful for growing the company and making it more profitable in the future.

In the October 13 issue of our enewsletter, we reviewed with you the tax deductions that are scheduled to sunset in 2011. There are also several tax credits that are scheduled to end in 2011. A tax credit is a direct dollar for dollar reduction in the amount of tax that you owe. Specific tax credits that are scheduled to expire in 2011 include the research credit, the work opportunity tax credit, and the new energy efficient home credit.

The research credit available in 2011 is allowed for research fitting the following criteria:

• Research taken on to find new technological information
• Research used in creating an original or enhanced business component
• The credit however is disallowed for research carried out following initial commercial production, research adapting a current product/process to a specific client, surveys, studies, research for internal use software, research done outside the US, research for social sciences/art/humanities, and research funded by an outside individual.

The calculation on the credit is a bit complex. It essentially equals the sum of: (1) 20% of the qualified research expense less the greater of 50% of the qualified research expenses or an amount based on a formula that takes account of the qualified research expenses and gross receipts in certain earlier tax years; (2) 20% of research payments to certain outside organizations; (3) and 20% of amounts paid or incurred to an energy research consortium for energy. This credit is scheduled to expire as of December 31, 2011. Therefore, if you can expedite expenses that would relate to this credit, this would be beneficial.

The work opportunity tax credit available in 2011 is allowed for eligible employees who fit the following criteria:

• Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program
• Qualified veterans
• Qualified ex-felons
• Designated community residents
• Vocational rehabilitation referrals
• Qualified summer youth employees
• Qualified member of families in the Supplemental Nutritional Assistance Program (SNAP)
• Qualified Supplemental Security Income recipients
• Long-term family assistance recipients

The tax credit can be worth as much as $2,400 for each eligible employee (with the exceptions of increased credits of $4,800 for certain veterans and $9,000 for employees who are long-term family assistance recipients). This credit is not available for individuals who begin work after December 31, 2011. Therefore, if you are planning on making new hires that would fall into any of the eligible employee categories above, you should do so before December 31, 2011.

The new energy efficient home credit available in 2011 is for contractors that have sold or leased an energy efficient home to an individual as a residence. Such eligible contractors can claim a credit for $2,000 or $1,000 for each qualified new energy efficient home. Therefore, speeding up the sale of such residences would be in the best interest of eligible contractors given this credit won’t be available in 2012.

Please note that the following items are by no means all the tax credits that will be expiring in 2011, but a list of items that we believe are most relevant to you. If you have any questions regarding, tax credits or other miscellaneous items that are to expire in 2011 and how you can take advantage of them in the current year, please contact Greenwalt CPAs Tax Services Group at 317-241-2999.