Page 1

Mastering uncertainty continued from page 1 2. Resources and capacity – Know your limits. Construc­ tion contractors, more than other entrepreneurs, risk their life savings with almost every project. Keeping talented people, maintaining needed equipment, ensuring bank and surety support, and having useful financial data through a ­construction-oriented CPA are critical to executing oppor­ tunities successfully. As contractors cut people and overhead to stay afloat, they must know what they can – and cannot – accomplish given their new operating capabilities. 3. Relationships – Strengthen relationships. Good working relationships with all parties on a job – or helping you with that job (sureties and bankers included) – can make the difference between a profitable contract and one that can put you under. If the owner, general or subs are inflexible, their unwillingness to negotiate key change orders can turn a tight job into a nightmare. 4. Make money – Plan to turn a profit. Know how “low you can go” yet still make money, and bid accordingly. Too many contractors take work below cost just to stay busy. Worse, they take jobs not knowing that the contract is below their cost. These practices can – and will – devastate any contractor. 5. Get paid – Plan for getting paid. Qualify everyone – generals and owners, subcontractors and vendors –

before you accept a job. A little homework up front can avert a lot of headaches as you finish the project. Chasing or litigating overdue invoices is extremely expensive, in both hours and lost profits. Finally, some construction contractors may decide their answer to these questions is “No,” that their business simply cannot survive the current market. When that is your decision, don’t delay the inevitable. Wind down operations now before they take you down. Contractors who proactively determine to hang up their tool belt before it hangs them can complete their open jobs, pay off creditors and move on to other ventures holding their heads high and their homes intact. Those who wait too long frequently find that the choice is made for them. Debt, losses and poor decisions get the better of them, and personal indemnifications may strip them of much or all of their wealth. That scenario need not happen to you. Grab uncertainty by the horns, and avoid getting gored. Take charge, work within your expertise and capacity, do your homework and keep relationships with key partners strong. No one is better suited to overcome such uncertainty than you! – Dan Owens, CPA, MBA, CCIFP

Building For Success The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS. © 2011 CPAmerica International

Mastering in uncertain times uncertainty

E

conomists, elected officials and business leaders alike know that uncertainty in today’s business environment is impeding economic growth. Are we recovering from this recession or about to double-dip? How can I keep key employees with no work? Will banks and sureties support me? Even if I can make money, will I get paid? Not knowing all the variables can often be more harmful than realizing a worst-case scenario and dealing with it. Such uncertainty can paralyze contractors rather than energize them to take charge and beat the odds. However, if ever there was an industry group well-suited to both survive and thrive in uncertain times, it would be construction contractors. Contractors – of all entrepreneurs – assess risk and overcome uncertainty in just about every facet of their business. They tend to be among the most confident and optimistic industry leaders. All they need to succeed is good information, a talented team, the right tools and the relationships necessary to get it done. U.S. businessman Harold Geneen once said, “Uncertainty will always be part of the taking-charge process.” In any bidding and performance ➜ Capitalization vs. repair: situation – past or present – contractors New rules from the IRS must take charge of the following five risks: ➜ Now’s the time to review ➧ Do we have the expertise to do the work? your strategic plan ➧ Do we have the resources and capacity to complete the project on time?

Inside Spring 2011

Inside

➧ Will our relationships with the owner/general, subcontractors/ vendors help us in negotiating key changes? ➧ Can we make money on this job? ➧ Will we get paid? Today, because of increased uncertainty, answering these questions can be more complex. Here are ways to avoid these five deadly pitfalls. 1. Expertise – Know your strengths. Overwhelming competition often tempts contractors to bid jobs in locations, fields or dollar amounts outside their wheelhouse. You can succeed with the right preparation and attention to the new risks, but taking such risks frequently results in striking out. Don’t venture into unfamiliar territory – geographic, job type or job size – unless you partner with someone who knows the territory well. Unfamiliarity with reliable subs, workers, unique conditions or job requirements can tank a contract – and the contractor – in a heartbeat. See Mastering uncertainty on page 4

An information bulletin to contractors from:

100 Second Avenue South, Suite 600, St. Petersburg, Florida 33701 | (727) 821-6161 | www.gsscpa.com


Capitalization vs. repair IRS issues new rules When dealing with different agencies in the federal government, sometimes it seems as if they’re working at cross-purposes. In recent months, Congress and the IRS have sent mixed signals to taxpayers and their advisers.

Recent congressional action

In recent years, Congress has offered accelerated tax deductions for the cost of certain assets. Tax laws such as the Section 179 expensing election and bonus depreciation have been further enhanced by recent congressional action. In the Small Business Jobs Act, signed by President Obama in September, Congress raised the Section 179 deduction amount to $500,000 for tax years beginning in 2010 and 2011. It also extended 50 percent bonus depreciation to qualified assets placed in service during 2010. Just three months later, in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, Congress increased the bonus depreciation percentage to 100 percent for qualifying property, including machinery and equipment, acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012.

Recent IRS announcement During the same months when Congress was offering higher tax write-offs for asset purchases, the IRS issued a new Audit Technique Guide and instructed its examiners to focus on the issue of whether an expenditure should be capitalized or deducted. Repair expenses are currently deductible if they are incidental in nature and neither materially add to the value of the property nor appreciably prolong its useful life. Costs for materials and supplies consumed during the year are also currently deductible. Expenditures must be capitalized if they are for permanent improvements or betterments that increase the value of the property, restore its value or use, substantially prolong its useful life or adapt the property to a new or different use. A key issue in determining whether an expenditure should be capitalized or expensed is the unit of property (UOP). The smaller the UOP, the more likely it is that costs incurred in connection with that UOP will have to be capitalized. For example, assume a company fixes a leaking roof on its manufacturing plant. If the unit of property is the roof, it is more likely that the cost must be capitalized. If the UOP is the manufacturing plant, it is more likely the cost will qualify as a repair.

Capitalization policies Reacting to congressional generosity as expressed in the recent legislation, businesses may be inclined to think that most expenditures qualify for the Section 179 deduction or 100 percent bonus depreciation. For the most part, these provisions do not apply to real estate, so cost segregation studies will still provide tax savings

2

when real property is built or remodeled. However, up to $250,000 of qualified real property (certain leasehold improvements and restaurant and retail improvements) is eligible for Section 179 expense in 2010 and 2011. For personal property, absent further congressional action, the enhancements to Section 179 and bonus depreciation are temporary. They are scheduled to expire at the end of 2011. Many companies make capitalization/expense decisions based on the dollar amount of the expenditure. For example, a business may expense amounts under $1,000, while higher expenditures are reviewed to determine the proper accounting and tax treatment. The new Audit Technique Guide suggests that IRS examiners will take the following steps in reviewing costs classified as repairs: ➥ Analyze detailed records to determine the reason the work was undertaken. Determine the extent to which costs were treated as a UOP separate from the primary UOP. ➥ Determine the asset’s age, acquisition date and any prior repair work that relates to that asset. ➥ Determine the purpose of the project and the dates the project began and ended. ➥ Consider how soon the work will have to be repeated. ➥ Consider whether expenditures: ➧ Result in new assets ➧ Improve the property, putting it in a better operating condition ➧ Add new components or material sub-components ➧ Add upgrades or modifications ➧ Enhance the value of the property in the nature of a betterment ➧ Extend the useful life of the property ➧ Improve the efficiency, quality, strength or capacity of the property ➧ Adapt the property to a new use The guide advises examiners to review the assets identified in any cost segregation study to determine whether the business is being consistent for purposes of both asset identification/ classification and determining whether an expense relating to that asset should be capitalized or treated as a repair deduction. For example, if an item is identified as a tangible asset and treated as personal property for purposes of asset classification and/or depreciation, it should not be treated as a structural component of a building to obtain repair treatment. – Michael Redemske, CPA

Spring 2011 Building For Success

“Measure twice, cut once”

is a common saying among ­construction professionals. You know the value of looking before you leap, of thinking ahead and of taking extra care. You know it saves you time, money and mistakes. Strategic planning is another way of measuring twice before cutting once. It’s a way of considering factors that can affect outcomes. Yet, many people in construction (and in business overall) fail to take the time to practice good strategic ­planning. They’ll say, “We’re too small,” or “So many factors are uncontrollable, so what’s the point?” In any business, there are uncontrollable factors, but that doesn’t mean they’re unpredictable. If we can’t control them, we should at least make an attempt to try to control their impact on our businesses. That’s what strategic planning can help you do. So, how do you develop a strategic plan? Here are a few keys to get you started. 1. Take a look at your blueprint. What are you trying to build? Do you want to be a big player in the market or a strong niche player? Do you want to be seen as a premium product or a bargain product? There aren’t necessarily right or wrong answers here. It simply helps to acknowledge what you’d like to be before you start planning how to get there.

Now’s the time to review your strategic plan 2. Understand the competition. Once you know the market you want to play in, think about who else goes after the same business you do. How do they set themselves apart? When you lose bids to other contractors, why do you lose them? Is it strictly price, or do they have a reputation for something special that gets them in the door? You don’t necessarily want to try to copy your competitors. You simply want to be able to differentiate yourself and to target opportunities based on that differentiation. 3. Understand the market. This is the part that takes a little prognosticating, and it’s the step that causes many people to throw up their hands and say “never mind.” You can’t know for sure what your market is going to do in the next one to three years, so you have to make some educated guesses. What are the “leading indicators” for activity in your particular market area? Are they related to your local chamber of commerce recruiting companies to relocate to your area? Is legislation requiring changes in buildings for “green” ­compliance? What factors could drive customers to request your services? Stay tuned to the economic climate in your area – it will help you identify opportunities that may come your way. 4. Review your outreach. How do you get the word out about your company? Are you targeting the right people for the type of work you want to get? Look at the jobs you’ve gone after in the past year. How did you learn about the

opportunity? How did the opportunity learn about you? What about those opportunities you didn’t know about until it was too late? Who did you miss? Target a few new areas or people to “court” over the next one to three years to open up new opportunities for your company. Then develop a plan to get and keep your name in front of those people. 5. Look inside. What factors within your company are impeding your progress? Do you need better systems in place to assure quality? Do you need more efficient processes to reduce costs? Do you need better reporting to help you manage schedules and budgets? Many times, it’s not the external market that causes us to lose opportunities. It’s our own shortcomings. Use industry statistics to gauge how you perform compared to similar companies. Most industry associations collect data on various key performance indicators. These can help you determine areas that need the most work. 6. Commit to action. Spending time developing a strategic plan won’t accomplish anything if you don’t commit to do something different as a result. Involve your team in the planning process and get commitments from team members on actions they will take. Set up reporting and measurement systems to track progress. “Measure twice, cut once” doesn’t work unless you actually make the required cuts. It’s not just strategic planning – you need some strategic doing. – Denise Altman, MBA, CPA, CPBA

Spring 2011 Building For Success

3


Capitalization vs. repair IRS issues new rules When dealing with different agencies in the federal government, sometimes it seems as if they’re working at cross-purposes. In recent months, Congress and the IRS have sent mixed signals to taxpayers and their advisers.

Recent congressional action

In recent years, Congress has offered accelerated tax deductions for the cost of certain assets. Tax laws such as the Section 179 expensing election and bonus depreciation have been further enhanced by recent congressional action. In the Small Business Jobs Act, signed by President Obama in September, Congress raised the Section 179 deduction amount to $500,000 for tax years beginning in 2010 and 2011. It also extended 50 percent bonus depreciation to qualified assets placed in service during 2010. Just three months later, in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, Congress increased the bonus depreciation percentage to 100 percent for qualifying property, including machinery and equipment, acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012.

Recent IRS announcement During the same months when Congress was offering higher tax write-offs for asset purchases, the IRS issued a new Audit Technique Guide and instructed its examiners to focus on the issue of whether an expenditure should be capitalized or deducted. Repair expenses are currently deductible if they are incidental in nature and neither materially add to the value of the property nor appreciably prolong its useful life. Costs for materials and supplies consumed during the year are also currently deductible. Expenditures must be capitalized if they are for permanent improvements or betterments that increase the value of the property, restore its value or use, substantially prolong its useful life or adapt the property to a new or different use. A key issue in determining whether an expenditure should be capitalized or expensed is the unit of property (UOP). The smaller the UOP, the more likely it is that costs incurred in connection with that UOP will have to be capitalized. For example, assume a company fixes a leaking roof on its manufacturing plant. If the unit of property is the roof, it is more likely that the cost must be capitalized. If the UOP is the manufacturing plant, it is more likely the cost will qualify as a repair.

Capitalization policies Reacting to congressional generosity as expressed in the recent legislation, businesses may be inclined to think that most expenditures qualify for the Section 179 deduction or 100 percent bonus depreciation. For the most part, these provisions do not apply to real estate, so cost segregation studies will still provide tax savings

2

when real property is built or remodeled. However, up to $250,000 of qualified real property (certain leasehold improvements and restaurant and retail improvements) is eligible for Section 179 expense in 2010 and 2011. For personal property, absent further congressional action, the enhancements to Section 179 and bonus depreciation are temporary. They are scheduled to expire at the end of 2011. Many companies make capitalization/expense decisions based on the dollar amount of the expenditure. For example, a business may expense amounts under $1,000, while higher expenditures are reviewed to determine the proper accounting and tax treatment. The new Audit Technique Guide suggests that IRS examiners will take the following steps in reviewing costs classified as repairs: ➥ Analyze detailed records to determine the reason the work was undertaken. Determine the extent to which costs were treated as a UOP separate from the primary UOP. ➥ Determine the asset’s age, acquisition date and any prior repair work that relates to that asset. ➥ Determine the purpose of the project and the dates the project began and ended. ➥ Consider how soon the work will have to be repeated. ➥ Consider whether expenditures: ➧ Result in new assets ➧ Improve the property, putting it in a better operating condition ➧ Add new components or material sub-components ➧ Add upgrades or modifications ➧ Enhance the value of the property in the nature of a betterment ➧ Extend the useful life of the property ➧ Improve the efficiency, quality, strength or capacity of the property ➧ Adapt the property to a new use The guide advises examiners to review the assets identified in any cost segregation study to determine whether the business is being consistent for purposes of both asset identification/ classification and determining whether an expense relating to that asset should be capitalized or treated as a repair deduction. For example, if an item is identified as a tangible asset and treated as personal property for purposes of asset classification and/or depreciation, it should not be treated as a structural component of a building to obtain repair treatment. – Michael Redemske, CPA

Spring 2011 Building For Success

“Measure twice, cut once”

is a common saying among ­construction professionals. You know the value of looking before you leap, of thinking ahead and of taking extra care. You know it saves you time, money and mistakes. Strategic planning is another way of measuring twice before cutting once. It’s a way of considering factors that can affect outcomes. Yet, many people in construction (and in business overall) fail to take the time to practice good strategic ­planning. They’ll say, “We’re too small,” or “So many factors are uncontrollable, so what’s the point?” In any business, there are uncontrollable factors, but that doesn’t mean they’re unpredictable. If we can’t control them, we should at least make an attempt to try to control their impact on our businesses. That’s what strategic planning can help you do. So, how do you develop a strategic plan? Here are a few keys to get you started. 1. Take a look at your blueprint. What are you trying to build? Do you want to be a big player in the market or a strong niche player? Do you want to be seen as a premium product or a bargain product? There aren’t necessarily right or wrong answers here. It simply helps to acknowledge what you’d like to be before you start planning how to get there.

Now’s the time to review your strategic plan 2. Understand the competition. Once you know the market you want to play in, think about who else goes after the same business you do. How do they set themselves apart? When you lose bids to other contractors, why do you lose them? Is it strictly price, or do they have a reputation for something special that gets them in the door? You don’t necessarily want to try to copy your competitors. You simply want to be able to differentiate yourself and to target opportunities based on that differentiation. 3. Understand the market. This is the part that takes a little prognosticating, and it’s the step that causes many people to throw up their hands and say “never mind.” You can’t know for sure what your market is going to do in the next one to three years, so you have to make some educated guesses. What are the “leading indicators” for activity in your particular market area? Are they related to your local chamber of commerce recruiting companies to relocate to your area? Is legislation requiring changes in buildings for “green” ­compliance? What factors could drive customers to request your services? Stay tuned to the economic climate in your area – it will help you identify opportunities that may come your way. 4. Review your outreach. How do you get the word out about your company? Are you targeting the right people for the type of work you want to get? Look at the jobs you’ve gone after in the past year. How did you learn about the

opportunity? How did the opportunity learn about you? What about those opportunities you didn’t know about until it was too late? Who did you miss? Target a few new areas or people to “court” over the next one to three years to open up new opportunities for your company. Then develop a plan to get and keep your name in front of those people. 5. Look inside. What factors within your company are impeding your progress? Do you need better systems in place to assure quality? Do you need more efficient processes to reduce costs? Do you need better reporting to help you manage schedules and budgets? Many times, it’s not the external market that causes us to lose opportunities. It’s our own shortcomings. Use industry statistics to gauge how you perform compared to similar companies. Most industry associations collect data on various key performance indicators. These can help you determine areas that need the most work. 6. Commit to action. Spending time developing a strategic plan won’t accomplish anything if you don’t commit to do something different as a result. Involve your team in the planning process and get commitments from team members on actions they will take. Set up reporting and measurement systems to track progress. “Measure twice, cut once” doesn’t work unless you actually make the required cuts. It’s not just strategic planning – you need some strategic doing. – Denise Altman, MBA, CPA, CPBA

Spring 2011 Building For Success

3


Mastering uncertainty continued from page 1 2. Resources and capacity – Know your limits. Construc­ tion contractors, more than other entrepreneurs, risk their life savings with almost every project. Keeping talented people, maintaining needed equipment, ensuring bank and surety support, and having useful financial data through a ­construction-oriented CPA are critical to executing oppor­ tunities successfully. As contractors cut people and overhead to stay afloat, they must know what they can – and cannot – accomplish given their new operating capabilities. 3. Relationships – Strengthen relationships. Good working relationships with all parties on a job – or helping you with that job (sureties and bankers included) – can make the difference between a profitable contract and one that can put you under. If the owner, general or subs are inflexible, their unwillingness to negotiate key change orders can turn a tight job into a nightmare. 4. Make money – Plan to turn a profit. Know how “low you can go” yet still make money, and bid accordingly. Too many contractors take work below cost just to stay busy. Worse, they take jobs not knowing that the contract is below their cost. These practices can – and will – devastate any contractor. 5. Get paid – Plan for getting paid. Qualify everyone – generals and owners, subcontractors and vendors –

before you accept a job. A little homework up front can avert a lot of headaches as you finish the project. Chasing or litigating overdue invoices is extremely expensive, in both hours and lost profits. Finally, some construction contractors may decide their answer to these questions is “No,” that their business simply cannot survive the current market. When that is your decision, don’t delay the inevitable. Wind down operations now before they take you down. Contractors who proactively determine to hang up their tool belt before it hangs them can complete their open jobs, pay off creditors and move on to other ventures holding their heads high and their homes intact. Those who wait too long frequently find that the choice is made for them. Debt, losses and poor decisions get the better of them, and personal indemnifications may strip them of much or all of their wealth. That scenario need not happen to you. Grab uncertainty by the horns, and avoid getting gored. Take charge, work within your expertise and capacity, do your homework and keep relationships with key partners strong. No one is better suited to overcome such uncertainty than you! – Dan Owens, CPA, MBA, CCIFP

Building For Success The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS. © 2011 CPAmerica International

Mastering in uncertain times uncertainty

E

conomists, elected officials and business leaders alike know that uncertainty in today’s business environment is impeding economic growth. Are we recovering from this recession or about to double-dip? How can I keep key employees with no work? Will banks and sureties support me? Even if I can make money, will I get paid? Not knowing all the variables can often be more harmful than realizing a worst-case scenario and dealing with it. Such uncertainty can paralyze contractors rather than energize them to take charge and beat the odds. However, if ever there was an industry group well-suited to both survive and thrive in uncertain times, it would be construction contractors. Contractors – of all entrepreneurs – assess risk and overcome uncertainty in just about every facet of their business. They tend to be among the most confident and optimistic industry leaders. All they need to succeed is good information, a talented team, the right tools and the relationships necessary to get it done. U.S. businessman Harold Geneen once said, “Uncertainty will always be part of the taking-charge process.” In any bidding and performance ➜ Capitalization vs. repair: situation – past or present – contractors New rules from the IRS must take charge of the following five risks: ➜ Now’s the time to review ➧ Do we have the expertise to do the work? your strategic plan ➧ Do we have the resources and capacity to complete the project on time?

Inside

100 Second Avenue South, Suite 600, St. Petersburg, Florida 33701 www.gsscpa.com | gss@gsscpa.com

(727) 821-6161 If we may answer any of your questions on the information contained in this publication, please contact us.

Spring 2011

Inside

➧ Will our relationships with the owner/general, subcontractors/ vendors help us in negotiating key changes? ➧ Can we make money on this job? ➧ Will we get paid? Today, because of increased uncertainty, answering these questions can be more complex. Here are ways to avoid these five deadly pitfalls. 1. Expertise – Know your strengths. Overwhelming competition often tempts contractors to bid jobs in locations, fields or dollar amounts outside their wheelhouse. You can succeed with the right preparation and attention to the new risks, but taking such risks frequently results in striking out. Don’t venture into unfamiliar territory – geographic, job type or job size – unless you partner with someone who knows the territory well. Unfamiliarity with reliable subs, workers, unique conditions or job requirements can tank a contract – and the contractor – in a heartbeat.

An information bulletin to contractors from:

See Mastering uncertainty on page 4

Building For Success Spring 2011 Newsletter  

In this issue: -Mastering Uncertainty in Uncertain Times -Capitalization vs. repair: New rules from the IRS -Now is the time to review your...

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