Small Construction Contracts Exception in the IRS code. For contractors whose average annual gross receipts for the three most recent years do not exceed a certain annual limit (currently $10 million), the IRS allows the profit on each job to be reported in the year the contract is substantially completed. This means that qualifying contractors may defer the profit on jobs that are open at fiscal year-end, the obvious benefit being deferment of income tax on the open projects. This exception requires that the contract be completed within a two-year period. It is legitimate to report income on uncompleted contracts in your company financial statements while deferring it for income tax purposes.
Track general expenses (payroll, rent, vehicle expense, insurance, etc.), bank balances, job costs, contract amounts, income, payables and receivables from the first day forward.
Hire only employees you have reason to believe will excel in all respects. Qualities to look for include honesty, strong sense of responsibility, enthusiasm, ability to think “outside the box,” the drive to do whatever is required to accomplish the task at hand and stable employment history. It is false economy to hire solely on the basis of cost. Only by surrounding yourself with superior key people can you manage your business to greater opportunities and profits for the long term.
Every contractor faces the great temptation to hire workers as “independent contractors” instead of as payroll employees. Because this is a hot area for the IRS, you must ensure that a worker meets independent contractor criteria if you hire him as such. Otherwise you may be subject to serious penalties. Here are only a few of the conditions the IRS claims it looks for in determining the status of a worker. The answers following the questions favor independent contractor status.
- Is there an agreement in writing between you and the worker? (Yes)
- Does the worker have the opportunity for profit and loss in his business? (Yes)
- Can the worker provide services to others in addition to you? (Yes)
- Do you pay the worker’s travel or other business expenses? (No)
- Are your firm’s employee benefits available to the worker? (No)
- Does the worker provide his own tools and equipment? (Yes)
- Does the worker have his own place of business and provide his own vehicles? (Yes)
Failure of any one of these tests alone does not necessarily disqualify independent contractor status, but the IRS is the IRS, and it may apply these or any other criteria it chooses. Get additional information on independent contractors at www.irs.gov.
You’ll need to apply for an employee identification number (EIN) for your corporation at www.irs.gov. You will need this number for filing all federal income and employee withholding tax returns. Sole proprietorships may use the owner’s Social Security number instead of an EIN.
Your corporation is registered with your home state’s secretary of state along with the corporation’s creation, but there may be other state and local agencies with which you must register. If you do business in other states, you’ll need to register with the secretary of state in each of them. Failure to register with secretaries of state can have serious legal and financial consequences. The attorney who incorporates or registers your company in other states should be able to inform you of all required registrations.
In addition to state corporation registration, most states and some local governments require contractors to prove their professional and financial qualifications in order to obtain a professional contractor’s license. If you fail to become properly licensed, you may be subject to fines and penalties and exclusion from the state’s court system. The professional licensing process can take several weeks, and in some states your contractor’s license may be required to have been issued even before you submit a bid on a project in that state.
A simple business license is usually required by the town or county.
Your long-term success as a contractor is going to depend to no small degree on the terms and conditions of the contracts you enter into with the customers you work for and the subcontractors who work for you. When possible, use forms published by the Associated General Contractors of America (AGC) or the American Institute of Architects (AIA), and modify them as required to meet the conditions of the project and to fairly allocate risk between the project owner and yourself. Many project owners create and require use of their own contract forms that are written in their own interest. Be aware that both what is and is not stated in the contract may distribute risk away from the project owner and onto to you. Hire an attorney who specializes in construction to review all contracts before you sign them unless you’re certain you know what to look for in contract terms and provisions.
You can improve your chances of getting paid for the work you do by following a few simple rules. Here is a sample of the practical questions to which you should get satisfactory answers before entering into a construction agreement.
Where is the project owner’s money coming from that he will use to pay you? He should be willing to answer this question to your, or your attorney’s, complete satisfaction.
Will the owner’s construction lender agree to reserve loan funds adequate to pay the full amount of the contract plus a reasonable contingent amount for change orders?
What is the owner’s track record for dealing with and paying contractors?
The project owner’s lender may request, prior to your starting construction, that you agree to complete the owner’s project for the lender in the event the owner defaults on the loan. You should require within the lender’s agreement that, in that event, you first be paid in full for work completed to date.
Your contract should state when and to what address and individual you can apply for progress