ABC Represents Contractors' Tax Interests in Washington, DC
I had the privilege of joining some of our fellow ABC members in Washington, DC last week. We spent time together on Capitol Hill discussing the issues facing contractors today. I was very impressed with the audience we were able to command. We had individual meetings with each of our state's Representatives and Senators. We discussed several issues and bills that are of concern to our members. One such bill is designed to bring tax relief to contractors.
Currently, contractors with a three year average gross revenue of $10,000,000 or more must report its taxable income on the percentage of completion method. When below that threshold, the contractor can use cash, accrual, or completed contract method.
The percentage of completion method can be very burdensome because it requires the contractor to pay taxes based on estimated results and potentially on revenue that will not be collected until much later. For example, if a contractor has to write a check for taxes paid on retainage that has been earned but hasn't been collected, the contractor may need to dip into cash reserves or even borrow the funds to pay the tax. This reduces the contractors bonding capacity, expansion opportunities, and job creation.
The $10,000,000 limit was set back in 1986 and has not been updated for inflation. The American Job Builders Tax Reform Act of 2011 (HR Bill 1993) proposes to increase that threshold to $40,000,000 and index it for inflation.
The bill also proposes to eliminate the Alternative Minimum Tax (AMT) adjustment for construction contractors. Currently, a contractor that is below the $10,000,000 threshold must report an AMT adjustment item for the difference between the profit reported (cash, accrual, or completed contract) and the profit reported using the percentage of completion method for long-term contracts.
Although there are some thresholds for C Corporations, there are no AMT thresholds for pass-through entities such as S Corporations and Partnerships. In these situations the AMT adjustment to percentage of completion has to be made and then reported on the owners' personal income tax returns. In essence, the taxpayer has to recalculate his or her taxes using an alternative method (AMT) and pay whichever amount is higher. I have seen some very small contractors penalized by the adjustment.
The passage of HR Bill 1993 would be a win for contractors. It is also a bill that is federal budget friendly. The proposed changes do not reflect "tax cuts". The changes just defer the payment of tax to a time when it is easier for the contractor to make the payment. Economists could also argue that the bill could even increase tax revenue. If you leave contractors with more working capital, they will contribute more to the economy and create more jobs, make more money, and increase taxable income in future years.
