Most building service contractors think about taxes year-round, but especially as April 15 approaches. Proper planning and professional assistance during tax time, as well as throughout the year, can help BSCs comply with myriad rules and regulations — and, hopefully, send less of their gross income to Uncle Sam.

(What follows is not legal, accounting or other professional advice. Contracting Profits strongly recommends you consult a qualified attorney, accountant or other expert regarding legal representation, your legal options or for interpretation of laws relating to your business.)

The first step in proper tax planning is surrounding yourself with the right advisers. For instance, Aetna Building Maintenance, Columbus, Ohio, employs a chief financial office, who also is a certified public accountant (CPA). The CFO tracks the various laws, including different sales taxes (Ohio has a sales tax on cleaning services) and stays current with each county to ensure compliance, says company president Paul Greenland.

Aetna also employs an external accounting firm to stay abreast of tax laws and compliance issues. In 2004, it offered suggestions on managing capital expenses, and about accounting procedures.

“They understand our business as contractors with labor, job costing and tax structures for state income tax, city income tax, and in some municipalities, a school-district income tax,” says Greenland.

The firm also audits Aetna’s financial statements to ensure they’re operating within Generally Accepted Accounting Principles (GAAP).

“Our bankers obviously like to see our financial statements,” states Greenland, who adds that accurate records help them to acquire loans when they’re needed. (This may be handy in 2005, as Aetna plans to expand as much as 20 percent.)

Cavalier Services Inc., Fairfax, Va., employs an external CPA firm to keep on top of changing tax codes.

“They’re a mid-size regional CPA firm” says Lance Ford, CPA, the company’s CFO. “Large enough to have industry exposure, but not so large that we’re charged unreasonable rates. They keep us aware of new legislation and understand our business, how it functions and where opportunities may lie as far as benefits within the tax code. “

In addition to meeting with the CPA firm at tax time, the two convene twice a year to discuss where Cavalier is going and what’s new legislatively. Cavalier also attends executive seminars, annual conventions and educational forums that help it to verify and validate the information its CPA firm provides. “It gives us a backstop,” explains Ford. “If we hear something unusual we may give them a quick call and ask about it.”

Cavalier is also an avid supporter of the Building Service Contractors Association International’s (BSCAI) legislative affairs group which lobbies for tax laws to benefit the industry. Current topics of interest include overtime and minimum wage laws and immigration reform, according to BSCAI’s Government Affairs Legislative Action Center (capwiz. com/bscai/home).

Insider advice
Even though many BSCs don’t want to deal with the Internal Revenue Service unless they have to, the agency’s educational arm is another resource. Troy Hasse, an IRS tax specialist based in Jackson, Miss., says the agency is committed to educating the public about three areas — payroll taxes and worker classification; electronic filing and payment; and limited-liability corporations. He offers some insight and tips on each:

Worker Classification/Payroll Taxes: “When you hire someone to work for you, it’s important to know whether they’re an employee or an independent contractor,” says Haase. “If an employee, you must withhold income tax, their portion of Social Security tax and Medicare tax, and reposit money for paying the employer’s portion of Social Security and Medicare tax. If hiring an independent contractor, normally you’re not responsible for these withholdings, but if you pay $600 or more in most cases you must file a 1099 by Jan. 31 to the payee.”

If employees fail to fill out Form W-9 with social security number, the business is still required to do backup withholding of 28 percent and report it on IRS Form 945: (Nonpayroll Withholding). Consequences of misclassification include assessments on wages paid, plus 20 percent of the employee’s share of Medicare and Social Security tax, employer’s share of Medicare and Social Security tax, and interest top of those. If a 1099 was never filed, these assessments are even higher.

“When you have a large payroll, it can result in a very large tax deficiency,” says Haase.

Limited liability corporations: Limited liability corporations (LLCs) are growing in popularity but aren’t actually recognized by the federal government, only state governments.

“We get a lot of questions about how to file an LLC return with the federal government and what tax forms to file,” says Haase. “The answer is it depends on how you’re set up.”

Because of this, there are a lot of complexities to LLC returns, so Haase suggests reading IRS Publication 3402 for more information on LLCs and federal taxes.

Electronic filing and payment: Haase also encourages electronic tax filing and payment, adding that S and C Corporations are now eligible.

“Electronic filing has less than a 1 percent error while hard copies have a 20 percent error due to lost mail, returns that are sent to the wrong service center, and human error in processing.” he says.

Electronic options for other tax-related procedures include IRS’s toll free number or free Electronic Federal Tax Payment System (EFTPS) for payroll tax deductions and tax payments. Visit eftps.gov for details.

“The system eliminates standing in line at the bank and is available 24/7,” he states.

For clarifications, or to find answers to tax-related questions, Haase recommends visiting the IRS Web site. This site has links to IRS articles, official publications, tax forms and software.

Regardless of how well educated he is, and how many deductions are available to him, Ford says tax laws and procedures won’t drive his business decisions.

“You [must] have a bottom line first,” he says. “If you don’t have that, taxes are irrelevant! There’s no surprise to ... taxes. As long as it’s built into your model it is what it is. It’s more important to drive the business to grow and reposition.”

Lori Veit is a business writer in Madison, Wis., and a frequent contributor to Contracting Profits.

Avoid Deduction Traps
Tax-deduction rules can be daunting, especially for newer or smaller contractors without a lot of accounting experience. Dante Odeh, CPA, principal of Chicago-based Odeh & Associates shares the following clarifications on common business deductions:

• Contractors who use their own automobiles for business purposes are entitled to certain deductions, but they need to be careful.

“People think they have right to use mileage deduction and an actual expenses deduction, but they have to choose between the two,” says Odeh. “The method can change from year to year, depending on which deduction works best for the business.”

Most people use standard mileage when their car is used for both business and personal purposes, Odeh adds, because personal expenses are not deductible.

• Meals and entertainment are only 50 percent deductible. “People tend to take whole amount, which means they’re underpaying and if they are audited, are assessed also a penalty and interest,” he says. Odeh also suggests write down the client (or prospect’s) name and the purpose for the meeting on the back of the check, and keeping it on file.

• To claim proper deductions for home-office expenses like utilities and telephone when working from a residence, the square footage of area used exclusively for business must be determined, and only that percentage of expenses such as mortgage, utilities, repair and insurance is deductible.

Paul Greenland, president of Columbus, Ohio-based Aetna Building Maintnenace, also uses deductions such as the Opportunity Tax Credit.

“If we hire people who are in a certain class, such as on welfare, we get tax credits,” he explains. “They come to us, or we target companies that are laying off, or go through the unemployment bureau.”

Aetna also takes full advantage of fast line depreciations like Section 179. Section 179 — Election to Expense Certain Business Assets — is a temporary regulation permitting small business taxpayers to deduct up to $100,000 of the cost of qualifying property purchased and placed in service in a taxable year beginning after 2002 and before 2006.

“That allows us to expense larger expenses faster than before, and faster depreciation reduces our bottom line, which means we pay less taxes,” says Greenland.




POSTED ON: 2/1/2005