Construction Tax Update By Rollin J. Groseclose, CPA, CGMA. NCACPA SALT Conference December 9, 2015

Transcription

1 Construction Tax Update By Rollin J. Groseclose, CPA, CGMA NCACPA SALT Conference December 9, 2015

2 Outline Overview of tax accounting rules Various legislative developments 2015 cases and rulings

3 Accounting methods Overall methods Cash (modified) Accrual Long-term contacts Completed contract Percentage of completion Other Hybrid

4 Cash basis Chief Counsel interim policy (Notice CC ) Contractors in businesses considered by the courts are NOT providing merchandise. Thus NOT required to use inventory accounts or accrual method of accounting. Specifically covers paving, painting, roofing, drywall, and landscaping contractors. Does NOT apply to: Resellers, manufacturers, or others required by IRC 448 to use accrual method. Situations where Reg (involving materials and supplies) applies.

5 Cash basis Rev. Proc businesses with average annual gross receipts of $1 million or less. Rev. Proc qualifying small businesses with average annual gross receipts between $1 million and $10 million. Not in an ineligible industry, Principal business is provision of services OR Principal business is customer-driven fabrication or modification of tangible personal property If above not met, must consider if materials / merchandise are significant income-producing factor. Still need to consider clear reflection of income rules. Cash basis used to determine when certain costs includible for capitalization.

6 Accrual basis Recognize revenue when rights to receive income are fixed and can be determined with reasonable accuracy Does contract include billing schedule or terms? Retainage generally not included until completion Deduct (incur) costs based on all-events test and when amounts can be determined

7 Long-term contracts Long-term contracts ones that start and finish in different tax years (not necessarily > 1 year) Generally percentage of completion (PCM) required, BUT Home construction contracts exempt (PCM still required for AMT) Small contractor exemption - $10M or less Blend of requirements from 263(a), 263A and 460 Spec homes are not built under a contract still subject to 263(a) and 263A

8 Extenders Bonus depreciation, 179, LHIs, etc Bill includes extension of 45L credit for construction of energy efficient homes

9 GAAP Revenue recognition Notice request for comments FASB effective > 12/15/ generally requires accounting consistency between books and tax 451 all events test right to income is fixed and can be determined with reasonable accuracy Construction businesses engaged in long-term contracts

10 NC sales and privilege tax Real property contractors (G.S and.4(a)(13)) New rules effective 3/1/16 A person that contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real property and to furnish tangible personal property to be installed or applied to real property in connection with the contract and the labor to install or apply the tangible personal property that becomes part of real property. The term includes a general contractor, a subcontractor, or a builder Consumer of tangible personal property general sales tax or 1% mill machinery privilege tax Retailer-contractor Must pay use tax Must charge sales tax to subcontractor Joint/several liability with subcontractor and owner

11 NC sales and privilege tax Real property contractor Retailer excludes: Person solely operating as real property contractor Person solely provides repair, maintenance and installation services Retailer-contractor Acts as retailer when selling tangible personal property Acts as a real property contractor when it performs real property contracts 50%+ contracting work; <50% is retailer Are there gaps? DOR to provide guidance before March 1 effective date

12 Real property broker Chief Counsel Advice Real estate professional is exempt from per se passive treatment for rental activities Real property trade or business includes brokerage Husband not state-licensed as real estate broker bringing together buyers and sellers Wife was state-licensed mortgage broker bringing together lenders and borrowers Husband qualified as real estate professional; wife did not

13 Sec 199 DPAD Prop Reg , 2, 3, 4, 6 and 8 DPGR does not include sale of multiple building projects as one item (item-by-item basis) need to substantially renovate each building Which taxpayer is eligible? Replace benefits and burdens of ownership requirement with party to the contract language i.e. person performing the work is taxpayer Construction has to be more than approval and authorization of invoices/payments. Need substantial renovation of real property

14 LTCG vs ordinary income Girard Development, L.P. Land developer (with subsidiary) Minor repairs made to property Significant planning costs incurred before sale Costs accounted for as CIP 1989 leasehold, 1997 purchase, 2002 sale Sale, but Girard had to continue development efforts Conclusion property held for sale ordinary income

15 263A PLR Relocation of land easement Costs clearly associated with construction project IRS ruled costs capitalized to building (not land) Eligible basis for low-income housing credit

16 More 263A Frontier Custom Builders Custom homebuilder Spec homes subject to 263A (vs 460) Frontier s argument primarily sales and design business, construction was all by sub s Tax Court Creative design was ancillary to production Production by subs was directed by Frontier CEO s $1.3M salary allocable Contemporaneous time records not available Fifth Circuit agreed with Tax Court

17 Completed contract Howard Hughes Company Residential land development Bulk sales, pad sales, finished lot sales, custom lot sales Dividing parcels, building infrastructure Did not construct residential dwelling units Tax Court Some were long-term construction contracts None were home construction contracts CC method not available Costs incurred were of a nature includible by home construction contractors in using CC method Fifth Circuit Court agreed

18 Unreported income Richard C. Wagner (TC Memo Decision) Long-time accountant Licensed electrician, S corp Reconstruction via bank account activity Taxpayer s arguments unsupported, lacked merit, records contradicted bank account activity Unreported rental income Dependency exemption, HOH status, child tax and earned income credits denied NOL carryforwards unsubstantiated Substantial understatement and negligence penalties upheld

19 Worker classification TFT Galveston Portfolio Tax Court disagreed with IRS successor in interest claims for prior employer taxes Taxpayer did have misclassified workers Ultimately subject to control over workers Workers didn t bear any risk and Workers had no financial investment Penalties for failure to timely file payroll tax returns, failure to pay tax on substitute returns, failure to timely deposit (no reasonable cause shown)

20 Employee or IC? Implications Payroll taxes and penalties Labor law benefits, pay rate ACA Workman's compensation Insurance IRS Voluntary Worker Classification Settlement Program

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22 Rollin J. Groseclose CPA, CGMA, Shareholder Johnson Price Sprinkle PA #groseclosecpa 22