March 27, 2008
Top 10 tax tips for contractors and developers
By DONALD CORBETT and CHRIS MORGAN
Grant Thornton LLP
Contractors and developers face complex tax issues that can strain resources and drain profits. As you face your 2007 tax filing, some or all of the following 10 contractor- or developer-oriented tax tips may help your tax burden.
1. Properly account for your lease income. You may be accounting for your lease income for tax purposes based on the cash received or on the terms of the lease agreement. However, a code section specifically addressing leases may require the income to be accounted for differently.
2. Look out for the expanded “kiddie tax.” In 2008, the kiddie tax will be expanded to require excess unearned income of full-time students under age 24 to be taxed at their parents’ marginal rate, unless the student’s earned income equals one half of his or her support. Plan to recognize income before the change takes effect or in the year the student reaches age 24.
3. Color your building green. Including solar and other alternative energy property in a new building can generate valuable tax credits. A new owner can deduct up to $1.80 per square foot of the cost of an energy-efficient commercial building instead of depreciating it over 39 years.
4. Sometimes don’t even think about it. The tax law requires that many soft costs, including property taxes, be capitalized if it is “reasonably likely” that a structure will be built or the land developed. So be careful in documenting your intent as it may result in capitalization of some expenses.
5. Understand your partnership or LLC agreement. Do you truly understand your partnership or LLC operating agreement? Do you know if the allocations among members have “substantial economic effect”? Do you know what a qualified income offset provision is? Do you understand minimum gain? In developer matters, operating agreements typically address these and other important tax issues. Chances are your agreement is written with such issues in mind, and it is important that you understand them completely.
6. Determine if your company can lower property taxes. A property tax review would ensure that all real and intangible property is excluded from the personal property tax base. In addition, there may be opportunities to lower the property tax valuations on your real property. The review would not only generate savings in the first year, but future years as well.
7. Analyze the structure of your business. How your business is organized can have a major impact on the amount of taxes you pay, especially in the areas of state, local and unemployment taxation. Consider the benefits of restructuring your business (for example, by establishing a partnership to provide inter-company services), while at the same time potentially reducing state, local and unemployment tax liabilities.
8. Take full advantage of depreciation. Has your company recently undertaken new construction projects, expansions or renovations? Substantial long-term savings could result from a cost segregation study, which categorizes your assets into the appropriate and most tax-advantaged depreciable lives.
9. Beware of what you do with an installment note. When an installment note received in connection with a sale is disposed of, the deferred gain will be triggered. In addition, the pledging of the installment note or the transfer of the note to an LLC might be deemed a disposition.
10. Consider a separate entity to own and lease fixed assets used in your business. Often referred to as “leasing companies” or “procurement companies,” these entities help manage your assets and may significantly reduce your sales and use tax a tax you collect and remit regardless of whether your company is profitable.
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