Construction Business Owner, May 2009

The construction industry is in its deepest decline since the 1930s. Construction companies are not only facing unprecedented challenges in their industry sectors, but they are also facing a rigid surety market that is meticulously defining levels of acceptable risk.

There has been a flurry of federal legislation since President Obama took the oath of office. On February 17, 2009, the President signed The American Recovery and Reinvestment Act of 2009 (The Act), a $790 billion stimulus package intended to unfreeze credit markets and spur the American economy. The Act contains approximately $140 billion in construction spending, the majority of which will be distributed to state governments. Hundreds of construction projects are expected to be launched across the country over the next three to six months.

State governments have enormous latitude in how they ultimately spend this money. It is vital that construction companies understand how their state legislature plans to spend its portion of the $140 billion cash infusion and adapt their business model to take advantage of infrastructure spending.

It is good business practice for construction companies to regularly apprise their lenders and bonding agents about trends in their business. Before meetings with your bonding agent and banking partners, take time to think about the following tax strategies that may improve your financial picture.

Extension of Net Operating Loss Carry Back Period

The Net Operating Loss (NOL) carry back provisions allow taxpayers to apply current year losses against prior year income and recover the taxes paid on that income. For losses incurred in 2008 only, the Act includes a provision that allows "small businesses" to extend their NOL carry back from what is currently two years to five years. A "small business" is defined in the Act as a corporation, partnership or sole proprietorship whose average annual gross receipts for the three-year period preceding the 2008 year were $15 million or less. Carrying back 2008 NOL's to the more profitable 2003 through 2007 years will result in an immediate cash infusion for cash-starved businesses. The five year carry back extension will help put much needed cash back into the pockets of construction business owners. Coordinate with your CPA to file your business and income tax returns in a timely fashion and then immediately file federal and state carry back claims.

Section 179 Expensing on Capital Expenditures and 50 Percent "Bonus Depreciation"

Take advantage of targeted tax-incentives in the Act designed to bolster a slowing economy such as the increased Section 179 deduction and the 50 percent "bonus" depreciation deduction. Under Code Section 179, a taxpayer can elect to deduct as an expense, rather than depreciate, the cost of new or used tangible personal property placed in service in the taxpayer's trade or business. The Act provides for an extension for capital investments and new equipment purchases through 2009. Companies spending $800,000 or less on total qualifying fixed asset purchases can immediately write-off $250,000 of capital expenditures in 2009. The 50 percent "bonus" depreciation extension allows companies to deduct 50 percent of the cost of qualifying property placed into service in 2009, in addition to regular depreciation.

Cost Segregations and Bonus Depreciation

During 2009, taxpayers will be allowed to combine bonus depreciation with cost segregation studies on any building where a contract was signed on or after January 1, 2008, and the building was completed by December 31, 2009. Even if the building has not been placed into service as of December 31, 2009, bonus depreciation will still be allowed on the percentage of work completed by December 31, 2009.

The combination of a cost segregation with bonus depreciation provides an opportunity to maximize tax deductions. The benefit is two-fold: First, certain components of the construction would be broken out into categories that are depreciated over shorter lives (three- to fifteen-year recovery periods). Second, these components could also be eligible for an immediate $250,000 Section 179 deduction and all remaining qualified components would be eligible for the 50 percent "bonus" depreciation.

Accelerating Interest Expense

There exists an opportunity to accelerate interest expense for tax purposes on construction projects not currently in a development stage. Interest expense incurred in connection with the production of real property must be capitalized as a cost of the property produced. The interest capitalization rules apply to the production of real property and indicate that interest expense must be capitalized during the development period. However, interest expense is often capitalized by construction companies before production has begun and is continued to be capitalized even after the property is being held available for sale. Construction companies have the ability to accelerate interest expense deductions for tax purposes that are incurred outside of the development period.

Immediately contact your CPA to determine if you can take advantage of this tax deferral strategy. By accelerating interest expense deductions for tax purposes, it is possible to increase the 2008 loss that you can carry back a minimum of two years and up to five years, if you qualify.