If you are a Construction Company Owners or a Contractor you have probably seen your share of Tax problems. You may be getting a notice from the IRS or the State Tax Authority, seems like this circle never stops. Over the last 20 years preparing returns for General contractors and Subcontractors, we have seen our share of Unforeseen Tax Challenges that Construction Company Owners & Contractors face everyday. Here are top 7 Tax Challenges for Contractors & Construction Company Owners.
Past Due Tax Return & Payments
Most Contractors are extremely busy and as a result they never have time to tackle their own finances. Subcontractors and workers are handing them bills and invoices that they purchased from local stores or big box retailers.
These receipts and invoices end up either in contractors work trucks and finally in boxes in their garage or basements, where they are never accounted for. As a result, this can result in past due tax returns.
We recommend you hire a in house bookkeeper who comes in once or twice a week to gather all your receipts, organize them, scan then and prepare a profit and loss and balance sheet for your CPA. Your Tax Accountant and CPA can then help prepare the return on time and help you stay on top of your tax burden.
Payroll Tax Issues
Several Contractors end up paying people on 1099 but don’t pay them on W2 as a result they are not withholding or paying proper payroll taxes and even workers compensation on their behalf.
Due to tight margins in construction forces many contractors and construction company owners to take shortcuts and pay people as independent contractors instead of W2 where they are required to pay matching Social Security, Medicare, FUTA and state Unemployment insurance.
IRS Record Retention
As most Contractors work in the field and are getting receipts and invoices from their Subcontractors, workers and supervisors, they miss many deductions. General Contractors and Construction company owners fall prey to not keeping all the documents organized.
You are required to keep the documents in case of an audit or any discrepancy in accounting.
Casual Labor Payments
Due to labor shortage, the construction industry is struggling to find qualified workers. Many contractors are so desperate that they are turning to non documented workers or hiring people from Home Depot parking lots or agencies such as Labor Ready. These workers don’t have proper legal status and many don’t have social security or green cards.
Hence they are forced to pay cash and don’t have any receipts to support their deductions. In the case of an audit, all these deductions may be disallowed resulting in huge tax bills and penalties.
Classification of Workers 1099 Vs W2 Laws
Is someone just working for you as a 1099 contractor or a W2 employee. Well there are different laws when it comes down to IRS and State, for example California.
There are some people who will be classified as 1099 for federal and W2 for state(After passing California Law AB5). This can be very complicated and many tax issues can arise from worker classification. Hence we recommend working with a Labor Law/Tax Attorney to make sure each worker is properly classified.
Tax Issues Relating to Inventory
In order to calculate your COGS or cost of construction, you need to account for your beginning inventory, purchases and ending inventory.
Many contractors don’t take the time to accurately calculate their beginning or ending inventory and several don’t keep track of their purchases, especially if they are not paid yet. This results in major problems when it comes down to paying correct income taxes in the correct year.
Tax On Revenue Recognition: Percentage of completion method
Many contractors use accrual accounting or percentage of completion method for revenue recognition. What that means is based on what percentage your home or project is completed, you are supposed to recognize the revenue and expenses.
Many bookkeepers are not very familiar with this and make mistakes. That results in incorrect Tax being paid and may get you audited. So make sure you have a great tax accountant or a CPA that is well versed in construction accounting to accurate revenue recognition.
Covid 19 has dramatically changed the construction industry. Construction company owners and contractors are dealing with shortage of labor and shortage of parts, especially when they are coming from overseas and stuck at the ports.
These 7 Tax Challenges for Contractors & Construction Company Owners make the lives of much tougher for them, their workers and their families.
Hopefully with changing times, labor shortage will ease and port problems will be sorted out. We highly recommend that in order to avoid these Tax Challenges, construction company owners and contractors work with professionals such as CPA, EA or accounting firms that understand the construction industry. These professionals can work with the owners and keep their financials and taxes in check so they can have peace of mind.
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