by tim george, cpa, mst, ccifp edwards - cabo 2011.pdf · expanded 1099 reporting for...

By Tim George, CPA, MST, CCIFP

Highlights of Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 The Act extends for two years the 2001 and 2003 Bush tax cuts

through 2012 as follows: 15% rate on capital gains and dividends. Top marginal tax rate for individuals kept at 35%. No limitation of personal exemptions and Itemized deductions thru

2012. Created a one-year, 2-percent reduction in in social security tax for

employees and self employed persons in lieu of the Making Work PayTax Credit.

Provides relief for some individuals from alternative minimum tax (AMT)for 2010 and 2011 by adjusting the exemption amount. This was notextended to 2012.

Increased the estate exemption to $5 million and a maximum rate of35% through 2012. The act allows for any unused estate tax exemption from the first

spouse’s estate to be used by surviving spouse’s estate up to a fullexemption of $10M. This is know as the “portability exclusion.”

An election must be filed with the IRS to take the carryoverexemption for the surviving spouse.

Brown, Edwards & Company, LLP

Marriage penalty relief has been extended.

The following credits were retained by this act: $1,000 Child Tax Credit. The American Opportunity Tax Credit (education credit).

The following personal deductions were extended for 2010 and 2011: State and local sales tax taxes in lieu of state income taxes as an

itemized deduction. The above the line deduction for qualified education expenses. The $250 above the line deduction for teachers.


Highlights of Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

Business Tax Issues:Recent Tax Acts

DEPRECIATION

Bonus Depreciation Is extended through December 31, 2012. The acts allow for first-year bonus depreciation on new (unused)

equipment which had expired at the end of 2009 as follows: 50% for purchases from 01-01-10 thru 09-08-10. 100% for purchases from 09-09-10 thru 12-31-11. 50% for purchases from 01-01-12 thru 12-31-12.

The act also includes an $8,000 bonus depreciation increase forpurchase of new luxury automobiles purchased through 2012. Luxury autos are those that weigh 6,ooo lbs or less. This increases the maximum first year depreciation allowed for

qualified luxury automobiles to $11,060. Previously it was capped at$3,060.


DEPRECIATION (continued)

Code Sec. 179 Expensing

The maximum Sec. 179 expense deduction is increased to $500,000 for taxyears beginning in 2010 and 2011 for equipment purchases up to a limit of $2million. The deduction is reduced dollar for dollar for every dollar spent inexcess of the $2 million.

The investment limit must be aggregated with qualified real property, seebelow.

The election to revoke, elect or modify a Section 179 election on an amendedreturn without IRS consent has been extended for any tax years beginningafter 2002 and before 2012 (previously was 2010).



DEPRECIATION (continued)

Qualified real property (non residential)

Section 179 is temporarily expanded to include the expensing of up to$250,000 of qualified real property, which is defined as “qualified”leasehold improvements, restaurant property and retail improvementproperty.

Unused Section 179 expense on qualified real property cannot be carriedover past 2011. The unused amounts will be depreciated using allowabledepreciation methods as if placed in service in 2011.



Business Tax Issues: The HIRE Act of 2010

Payroll Tax Holiday Exempts the employer from their share of the Social Security tax on

wages paid from March 19, 2010 thru December 31, 2010.

Qualified employee:Must be hired between February 4, 2010 and January 1, 2011. Has not been employed for more than 40 hours during the 60 day

period ending on the hire date .The 60 day period can span between 2009 and 2010, but it must be

continuous.Hired to replace employees terminated voluntarily or with cause.Can be a recent college graduate.Cannot be related to owner/employer.


Payroll Tax Holiday (continued)

Claiming the Exemption

The employee must certify they meet the requirements by signing aForm W-11 prior to claiming the exemption on Form 941.

Form W-11 is to be retained by the employer.

The payroll tax exemption for the first quarter of 2010 must beclaimed on the second quarter Form 941.

The Form 941X has been updated to allow for an amendment toclaim exemptions that was previously missed.



The New Hire Retention Credit A credit available for each retained worker that qualified for the payroll tax

exemption. Credit is lesser of $1,000 or 6.2% of employee’s wages during first 52-

week consecutive period. Must be employed on any date during a tax year on or after February 4,

2010 and employed for 52 consecutive weeks. Credit allowed for employer’s tax year in which the 52 week period ends Does not reduce compensation deduction.

Can get both payroll tax holiday benefit and retention credit for sameemployee.



General Business Credits (Small Business Jobs Act)The Act allows a small business (revenues less than $50 million) to carry backgeneral business credits (such as research and energy) 5 years or forward 25years. The law previously allowed credits to be carried back 1 year andforward 20 years.Effective for credits earned in taxable years beginning in 2010.

Flexible Spending and Health Savings Account (Health Care Reform Act) New Limitation

Starting 2011 Over-The-Counter Drugs, except for insulin, will no longer bereimbursable tax free under these arrangements unless prescribed by aphysician.

PenaltiesStarting 2011 the penalty is increased from 10% to 20% for distributions ofnon- qualifying medical expenses from Health Savings Accounts.

Business Tax Issues:Other Miscellaneous Tax Act Changes


Built-In GainsTax (Small Business Jobs Act)The Act has amended the Built-In Gains recognition period from 10 yearsdown to 5 years beginning 2011.

For Companies who made an S election as of January 1st, 2006 or prior,the Company’s built-in gain recognition period would end on December31, 2010. The Company could sell built-in gains assets in 2011 and wouldnot be subject to the built-in gains tax.

Start-Up Expense Deduction (Small business Jobs Act)The Act raises the deduction limit to $10,000 (previously $5,000) andincreases the phase-out threshold to $60,000 for the tax years beginningin 2010. Excess expenses over $10,000 are amortized over 180 monthsbeginning with the month the business starts.



Expanded 1099 reporting for 2012 (Health Care Reform Act)The Act requires businesses that pay $600 or more to purchase property andservices from any corporation (excluding tax exempt corporations), individual orunincorporated business to be reported on a 1099. This would include paymentsto Lowes, Staples etc., even if paid via credit card.

We may see upcoming changes to this requirement.

Expanded W-2 Reporting for 2012 (Health Care Reform Act)The Act requires that health insurance premiums paid on behalf of employees bereported on the employees’ Form W-2 (Revenue Procedure 2010-069) beginningin 2012 (Optional for 2011).

The reported premiums are not taxable, just for informational purposes only.



Other Miscellaneous Topics

Qualified Small Business Stock (Section 1202) Gain Exclusion Qualified small business (QSB) stock is original issue stock of C

corporation with < $50 million in assets meeting other tests. Gain allowed for the exclusion is the greater of 10 x basis of stock or $10

million

In lieu of using capital gains rate ( currently 15%) the portion of the gainthat is taxable is taxed at 28% not 15%.

Stock must be held more than 5 years to qualify for the exclusion

50% exclusion (14% effective rate) if acquired 08-11-93 to 2-17-09 75% exclusion (7% rate) if acquired 2-18-09 to 9-24-10 100% exclusion (0% rate) if acquired 9-25-10 to 12-31-11

Individual Tax Issues:Small Business Jobs Act


Individual Tax IssuesHealth Care Reform Act Changes Effective for 2013

Higher MedicareTax The Act imposes an additional 0.9% Medicare tax on wages and self-

employment earnings in excess of $250k married filing jointly or$200k for single filers.

The tax is imposed on the employee. However, employers will berequired to withhold the tax on wages over the threshold.

A married couple both earning $150k each would be subject to the0.9% Medicare tax because their combined wages have exceeded thethreshold of $250k even though the tax had not been withheld. Thetax would be assessed and payable on their individual income taxreturns.



Medicare Surtax The Act imposes a 3.8% Medicare surtax on net investment income

on taxpayers with modified adjusted gross incomes of $250Kmarried filing jointly and $200k single.

The tax will be imposed on interest and dividend income, annuities,royalties, rents and capital gains.

Trusts and estates will also be subject to this tax, if net investmentincome is over certain threshold amounts.

Income from passive activities could also be subject to the tax, iftaxpayer’s income is over the $250k and $200k thresholds.

Tax exempt bond interest, a taxable gain on sale of personalresidence, distributions from qualified plans, IRA’s etc. are notsubject to the Medicare Surtax.


Individual Tax Issues:Health Care Reform Act Changes Effective for 2013


DISCLAIMER

The information provided and discussed inthis presentation may not apply to yourspecific situation. The tax laws listed in thispresentation are subject to change. Pleaseconsult your tax advisor for your specificsituation.


Accounting for Leases – Lessee The Financial Accounting Standards Board (FASB) and

the International Accounting Standards Board (IASB)issued joint proposals in an effort to improve financialreporting information about the financial effects of leasecontracts.

The proposals will affect both lessees and lessors ofcertain equipment and investments.

Accounting & Auditing Updates


Accounting for Leases – Lessee The proposals issued for comment are:

FASB - Exposure Draft (ED), Leases (Topic 840)

IASB ED – Leases

Comments on the proposals are due December 15, 2010.

Final guidance expected June 2011.



Accounting for Leases – LesseeCurrent Approach

GAAP requires leases to be classified as one of twomethods based on the terms of the contract:

Operating lease – Rental payments are expensed asincurred.

Capital lease – If certain criteria are met, an asset anda liability is recorded based on the present value of thefuture payment obligation.



Current Approach

Capital lease requirements

Lease has a non-cancelable lease term and at leastone of the following criteria:

Ownership of the asset transfers.

Agreement contains a bargain purchase option.

Lease term is at least 75% of the economic life ofasset.

Present value of lease payments is > 90% of assetsfair value.



Problems with the Current Approach

Fine line between reporting an asset and liability (capitallease) or not (operating lease), resulting in many leasesbeing left off of the balance sheet.

When the operating lease approach is used, users have toestimate the future financial impact of the leases on thecompany’s cash flows, working capital, etc.

Neither method takes into account contingent leases andlease options.



Proposed Approach

FASB - Exposure Draft (ED), Leases (Topic 840) - willrequire lessees to account for leases using a “right of use”approach.

An asset will be recorded for the right to use equipmentand other property and a liability for the discountedvalue of the payment obligations over the “expected-outcome” or life of the lease.



Proposed Approach

Exceptions

Leases of intangible assets other than right-of-useassets.

Leases of biological assets.

Leases for exploration for use of natural resources.



Proposed Approach

Accounting

Lessees will use an “expected-outcome” approach thatwill require the lessee to use the longest lease termpossible that is “more-likely-than-not to occur” to bookthe original asset/liability.

The approach will require that the lessee take intoaccount the following when assessing the “expected-outcome” or term of the lease:Contingent rentalsLease optionsResidual values



Proposed Approach

Accounting

The value of the asset and offsetting liability isdetermined by discounting the sum of the payments tobe made over the expected life of the lease.

The discount rate is the lessee’s incremental borrowingrate at the inception of the lease.

Short-term option (12 month or less term) – allowspreparer to use the full amount of the obligation torecord the asset and liability.



Proposed Approach

Accounting

Lessees will have to make assessments over the lifeof the lease as to whether new facts andcircumstances result in significant changes of thecontingent rentals and renewals.

If estimates/expectations change, the lessee will needto adjust the carrying value of the asset and relatedliability.



Proposed Approach

Accounting Asset - will be amortized over the shorter of the useful

life of the asset or the term of the lease.

Liability – will be reduced as payments are made withan offset to interest expense.

Typically, amortization expense will replace rentexpense on the financial statements





Balance SheetStatement of Comprehensive

Income Statement of CashflowsAsset is reported in Property & Equipment separate from other assets.

Classify the cost of new leases as investing activities.

Liability is presented separately from other financial liabilities distinguished between current and non-current portions.

Classify cash repayments of principal as financing activities, separate from other financing cashflows.

Amortization and interest expense is presented separately from other amortization and interest expense or disclosed in the footnotes. No rent expense.

Proposed Approach

Reporting:

Proposed Approach

Disclosures:Disclose information identifying and explainingamounts recorded in the financial statementsthat enables users to evaluate amounts, timingand uncertainty of cash flows arising from thelease arrangements.



Proposed Approach

DisclosuresItems to disclose: Nature and terms of the lease including renewals, options ,

residual value guarantees, etc. Judgments relating to amortization methods, renewal

options, penalties, discount rates and any changes to theseassumptions.

Whether the short-term option has been used. Reconciliation between opening and closing asset and

liability balances. Estimated future payments required to meet the debt

obligations.



Potential Impact Reporting entity Will have an immediate negative impact on working

capital and potentially on liquidity and other financialratios.

Operating leases on hand will be assessed and assetsand liabilities will be reported on the balance sheet.

Capital leases will be reassessed to account forcontingencies and lease options not previouslyaccounted for.

Will require scrutiny over the life of the lease. Additional administrative costs and time.



Potential Impact Users Provides a more realistic view of future obligations of

the preparer. Accounts for off balance sheet assets and liabilities

previously only disclosed in a footnote. Eliminates the need of users to estimate future cash

requirements to cover the lease obligations.



Proposed Accounting Standards Update 1820-100, Revenue Recognition (Topic 605): Revenue from Contracts with Customers

FASB joint proposal with the IASB.

Proposal submitted in an attempt to establish a single accountingstandard for revenue recognition that covers all industries that havecontracts with their customers.

Proposal specifies the principals that an entity would apply to reportinformation about the amount, timing, and uncertainty of revenue andcash flows arising from its contracts to provide goods or services tocustomers.

The proposal will require contractors to recognize revenues in anamount that reflects the consideration that it will receive in exchangefor goods or services transferred to customers.




The proposal will:Supersede the current standards under SOP 81-1;Change the way earned revenues will be calculated;Change the cost capitalization rules in that only costs

incurred in the fulfillment of the contract will becapitalized;Change how estimated losses are accounted for;Require additional scrutiny regarding how claims and

change orders are accounted for;Require additional disclosures.




Specifically, under this proposal to recognizerevenues an entity would:Identify the contract(s) with a customer;Identify the separate performance obligations in thecontract;Determine the transaction price;Allocate the transaction price to the separate performanceobligations; andRecognize revenue when the entity satisfies eachperformance obligation.




Potential impact Could change percent complete calculations. Decoupling of revenues and expenses, as revenues will be based on

performance obligations and not costs incurred. Inconsistent/subjective views on what makes up “performance

obligations” by contractors. Significant profit fades and gains through the construction process

as revenues aren’t matched to costs incurred. Inconsistent accounting for claims and change orders. Financial statements will be less useful to users such as sureties and

banks. Could lead to manipulation of profit margins. Accounting software inadequate at this time. Significant additional administrative costs and audit fees.



Proposed Accounting Standards Update 1840-100, Contingencies (Topic 450): Disclosure of Certain Loss Contingencies

The proposal would require entities to disclose qualitative andquantitative information about loss contingencies to enablefinancial statement users to understand: nature of loss contingencies potential magnitude and potential timing (if known)

The proposal would require the disclosure of remote losscontingencies and provides that the assessment of themateriality of loss contingencies would not take into accountthe possibility of recoveries from insurance or otherarrangements.




The proposal retains current disclosure requirements andrequires additional disclosures such as:

publicly available quantitative information,

other relevant non-privileged information,

and in certain cases information about possible recoveries.

As proposed, the new guidance for non-public entities wouldbe effective for the 2011 calendar year and fiscal yearsbeginning after December 15, 2010.




Potential ImpactAdditional claims disclosed that once may have not

been required.

More administrative time gathering info

Possible additional cost of confirming claims withattorneys and insurance agents



Being successful in a competitive marketBy Eddie Thompson, CCIFP

Bidding & Pricing Strategies

Lack of financial goals and direction

Inaccurate bidding rates used for indirect and

administrative costs

Same bidding rates for all job sizes

Profit rates used inconsistent with

financial goals

“Guesswork” used in bidding against

competition

These are the typical problems experienced by most contractors:



Establish strategic direction and financial goals

Determine actual bidding rates considering job size and company financial goals

Track your competition’s rates to help reduce bid spread and obtain work

This program is designed to:




Anatomy of a Bid

Fixed Costs “Known”:- Materials- Subcontractors- Labor- Other direct costs



Indirect Costs:- General liability insurance- Equipment costs:

- Depreciation- R&M- Insurance

- Consider developing internal equipment rental rates

- Typically allocated as percentage of “Total Indirect Costs divided by Labor” multiplied by Budgeted Labor in the bid



Overhead Recovery Rates:- Breakeven rate- Single rate works when jobs are identical with the

same ratio of materials and subs to labor (not common)

- Dual rates more effective when jobs have a different mix of materials and subs to labor (most common)- Two different markup percentages are applied to recover

overhead- Material & subcontracts recovery rate- Labor recovery rate

- Job cost multiplier used to adjust for various job sizes



Overhead Recovery Rates (continued):- Materials and subcontracts recovery rate:

- Lower percentage applied- Less risk and overhead associated with the

procurement of materials and subcontracts



Overhead Recovery Rates (continued):- Labor recovery rate:

- Labor is significant driver of overhead rate- Represents the single largest component of risk

and opportunity for profit on most construction projects

- Rate is higher on labor- Equipment intensive contractors can elect to treat

equipment costs similarly to labor in these calculations (generate high amounts of overhead)



Overhead Recovery Rates (continued):- Job Size Multiplier

- Exists to adjust overhead variable to job size- What costs more overhead? Managing ten $1M

jobs or one hundred $100K jobs?- Jobs of different sizes should not share the same

percentage of overhead- Apply this multiplier to the normal amount of

overhead you would apply



Profit Rate (%age)- This goes beyond the breakeven point- Most subjective, “bendable” in determining

how to compete with competitors’ bids



Budget Pricing Model:- Start with an annual budget

- Estimate:- Revenues- Direct Costs- Indirect Costs- Overhead- Profit

- Recovery rates and profit percentage are established from your budget



Compare budget monthly with Actual numbers:- Recovery and Profit rates should adjust

themselves accordingly to meet budgeted goals

- As components of your budget exceed targetedamounts the recovery and profit rates have toadjust themselves in order to compensate(typically OH rates decrease and profit rateincreases)



Analyze budget monthly for revisions:- Circumstances change:

- Volume- Gross profit- Staff #’s and salaries

- If budget revisions or rates are higher than acceptable for bidding purposes, one of two areas need revised:- Overhead, or- Profit



• OH recovery and profit rates based on budget

Annual Budget

• Actual OH recovery and profit rates

Actual to Date• OH recovery

and profit rates needed to reach budget

Projected to Year End



+=

Competitor analysis- Track your competitors bids across multiple jobs for trends:

- Statistical probabilities can be used to estimate the probability of obtaining jobs against a particular or combination of competitors at different levels of gross profit


Bidders Bids

TotalEstimated Contract

Costs

Estimated Gross Profit

Estimated Gross

Profit %

Company A $35,000 $28,875 $6,125 17.5

Company B 37,500 28,875 8,625 23.0

Company C 38,500 28,875 9,625 25.0

Company D 38,700 28,875 9,825 25.4

Company E 47,500 28,875 18,625 39.2


Actual to Date Projected to YE Annual Budget

Revenues $10,000,000

Materials (1,500,000)

Subcontractors (500,000)

Labor (4,000,000)

Indirect costs (1,250,000)

Overhead (500,000)

Net Income $2,250,000

Indirect rate 31.25%

M&S recovery 4.63%

Labor recovery 10.19%

Profit rate 22.50%




Revenues $5,000,000 $10,000,000

Materials (750,000) (1,500,000)

Subcontractors (250,000) (500,000)

Labor (2,000,000) (4,000,000)

Indirect costs (625,000) (1,250,000)

Overhead (250,000) (500,000)

Net Income $1,125,000 $2,250,000

Indirect rate 31.25% 31.25%

M&S recovery 4.63% 4.63%

Labor recovery 10.19% 10.19%

Profit rate 22.50% 22.50%




Revenues $5,000,000 $5,000,000 $10,000,000

Materials (750,000) (750,000) (1,500,000)

Subcontractors (250,000) (250,000) (500,000)

Labor (2,000,000) (2,000,000) (4,000,000)

Indirect costs (625,000) (625,000) (1,250,000)

Overhead (250,000) (250,000) (500,000)

Net Income $1,125,000 $1,125,000 $2,250,000

Indirect rate 31.25% 31.25% 31.25%

M&S recovery 4.63% 4.63% 4.63%

Labor recovery 10.19% 10.19% 10.19%

Profit rate 22.50% 22.50% 22.50%




Revenues $10,000,000

Materials (1,500,000)

Subcontractors (500,000)

Labor (4,000,000)

Indirect costs (1,250,000)

Overhead (500,000)

Net Income $2,250,000

Indirect rate 31.25%

M&S recovery 4.63%

Labor recovery 10.19%

Profit rate 22.50%




Revenues $5,000,000 $10,000,000

Materials (900,000) (1,500,000)

Subcontractors (250,000) (500,000)

Labor (2,250,000) (4,000,000)

Indirect costs (800,000) (1,250,000)

Overhead (300,000) (500,000)

Net Income $500,000 $2,250,000

Indirect rate 35.56% 31.25%

M&S recovery 4.92% 4.63%

Labor recovery 10.82% 10.19%

Profit rate 10.00% 22.50%




Revenues $5,000,000 $5,000,000 $10,000,000

Materials (900,000) (600,000) (1,500,000)

Subcontractors (250,000) (250,000) (500,000)

Labor (2,250,000) (1,750,000) (4,000,000)

Indirect costs (800,000) (450,000) (1,250,000)

Overhead (300,000) (200,000) (500,000)

Net Income $500,000 $1,750,000 $2,250,000

Indirect rate 35.56% 25.71% 31.25%

M&S recovery 4.92% 4.25% 4.63%

Labor recovery 10.82% 9.36% 10.19%

Profit rate 10.00% 35.00% 22.50%



Bid Price BreakdownMaterials 500,000

Subcontracts 400,000

Labor 1,500,000

Indirect Variables:

Labor 1,500,000

Indirect rate 25.71% 385,715

Overhead:

M&S Cost 900,000

M&S recovery rate 4.26% 38,300

Labor 1,500,000

Labor recovery rate 9.36% 140,400 178,700

Total Costs of Project 2,964,415

Desired Profit 35% 1,596,000

Bid Price $4,560,415



In building your bid:- Fixed costs “are what they are”- Indirect rate should not be subjective- Will your OH and profit rates allow you to be

successful after considering your competitor analysis?

- What do you feel comfortable changing in your budget?



Conclusion:- Analyze your competitors bids!- Do not assume that all jobs should carry the

same overhead recovery rates!- Emphasis should be on budgets!- Bid rates for overhead and profit based on

budgeted amounts with constant evaluation “to actual”!

- ….and frequent rate adjustments and evaluations made to achieve final budget results!!



by tim george, cpa, mst, ccifp edwards - cabo 2011.pdf · expanded 1099 reporting for...

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