Without action from Washington, painters and other specialty trade contractors “could see a significant tax increase next year, as about 50 tax provisions expire at the end of this year,” the American Subcontractors Association warns.
The vanishing benefits include favorable capital-gains rates, favorable individual income-tax rates, lower dividend rates, numerous energy incentives, bonus depreciation and most of the estate and gift tax reform provisions passed at the end of 2010, according to ASA.
Drawing on advice from global tax advisors Grant Thornton LLC, ASA advises subcontractors to employ careful tax planning and work closely with tax advisers on how these potential changes will affect them, while taking advantage of the current benefits.
For example, Grant Thornton advises:
• Use bonus depreciation in 2012 while you can. Subcontractors can continue to write off half of qualifying asset purchases throughout 2012.
• Review deferred compensation plans. Many subcontractors are struggling to remain profitable in this difficult economic environment. If your company can’t afford large bonuses to retain key employees, it may be time to revisit alternative compensation arrangements.
• Be aware of “hidden” deferred tax liabilities: Subcontractors should work with their tax advisers to make sure that future cash taxes are taken into account in cash-flow planning.
• Take full advantage of capital asset expensing deductions. Rules originally intended for small businesses were significantly expanded to allow contractors to expense up to $500,000 of 2010 fixed asset costs, provided that assets of less than $2 million were placed in service throughout the year. Unlike bonus depreciation, this applies to new or used assets. A subcontractor who is already in a tax-loss position, however, cannot take this deduction.
• Determine whether your company can reduce property taxes. A property-tax review can ensure that real and intangible property is excluded from the personal property tax base.
• Examine capital asset depreciation methods and lives. Depreciation of fixed assets is one of the most complex aspects of tax law. Understanding and properly applying these rules can accelerate income tax deductions.
• Consider establishing a separate entity to own and lease fixed assets used in the business. These entities can help manage assets and may significantly reduce sales-and-use tax, which is collected and remitted regardless of whether a company is profitable.
• Maximize Section 199 deductions. The Section 199 domestic production activities deduction is a unique tax incentive allowing taxpayers to deduct 9 percent of qualifying production activities, which include the construction or substantial renovation of domestic real property.
For more information, contact Todd Taggart, a partner and national construction practice leader, at Grant Thornton.