Tax season is upon us, and you know what that means. Construction companies across the nation are gearing up to file their income tax returns for the previous year. As of the time of this writing, sole proprietorships and corporations have until April 15, 2020, to file, while partnerships and S corporations have until March 16, 2020. With deadlines fast approaching, will your company be ready when the time comes to report your company’s earnings and deductions?
In this article, a West Palm construction lawyer with Cotney Construction Law highlights several of the most common tax mistakes that trip up contractors and construction companies. While most tax mistakes are made in good faith, contractors can nonetheless find themselves in legal trouble for failing to accurately report their earnings or classify their workers. If you ever find yourself in need of sound tax advice, our attorneys are standing by.
1. Misclassifying Workers
In our growing gig-economy, classifying workers is only becoming more difficult for construction companies who use independent contractors to combat labor shortages. Discerning whether a worker is an independent contractor or an employee is essential for avoiding penalties that have hindered numerous other companies. As stated by the Internal Revenue Service (IRS), “Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee.”
The IRS recommends that employers consider behavioral control, financial control, and the basis of your relationship with regards to a worker. While classifying a worker can be a nuanced process, if you have control over a worker’s schedule, resources, location, and work performed, they are likely an employee and not an independent contractor, regardless of what their contract states. Consult a West Palm construction attorney with any questions you may have about classifying workers.
2. Poor Accounting Methods
There are two methods for accounting: the accrual method and the cash method. Depending on the size of your company, you may benefit from one, the other, or a combination of both. For example, if your business is a C corporation with gross receipts over $5 million, you are required to use the accrual method (consult a West Palm construction lawyer for possible exceptions). The accrual method must also be used if materials contribute to your business’s income. Whatever method your company decides on, you must ensure that you accurately track and report income, but how do you report income on projects that last for years?
3. Long-Term Contracts and Indirect Costs
The recent passing of the Tax Cuts and Jobs Act allows smaller contractors the chance to postpone taxation until project completion or until final payment — invaluable for avoiding cash-flow issues. Under the new law, contractors with annual gross receipts under $25 million (previously $10 million) can now either postpone taxation or use a percentage of completion method, whichever benefits their business the most.
Of note, if you’re using a percentage of completion method, you must allocate indirect job costs to your long-term contracts annually. Examples include the cost of repairs, equipment maintenance, utilities, depreciation of construction equipment, and workers’ compensation insurance. However, it does not include exempted costs, such as marketing expenses or expenses for failed bids and proposals. Contractors using a completed contract method won’t be able to deduct indirect costs until the contract is complete and will need to be careful not to overstate their deductions. A Boca Raton construction attorney is standing by to assist in determining the tax methods that are right for your company.
4. Working Out-Of-State
Contractors already have a number of concerns to contend with when working out of state. Every state has its own individual laws regarding general liability insurance, workers’ compensation insurance, and licensing — taxation is no different. For example, while individuals don’t have to pay income tax in Florida, corporations, including those from out-of-state, must file a Florida corporate income tax return — the state’s corporate income tax currently stands at 5.5 percent. S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships, on the other hand, pay no state income taxes in Florida.
Of course, whether you work out of state or not, you’re still required to pay a federal corporate tax. The Tax Cuts and Jobs Act imposes a flat 21 percent tax rate on C corporations. For qualified S corporations, sole proprietorships, or partners in the maximum tax bracket of 37 percent, the maximum tax rate is 29.6 percent.
Consult a Construction Attorney With Any Questions
We hope the above has shed light on what is a necessary, albeit confusing, process for contractors and construction companies to go through. Correctly classifying workers and reporting revenue is a vital skill that all contractors must possess if they hope to grow their businesses while remaining compliant with state and federal law. As advocates for the construction industry, we’ve made it our mission to support industry professionals in any and all construction-related legal matters. If you are in need of sound tax advice from an experienced Boca Raton construction lawyer, turn to a team at Cotney Construction Law.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.