As April 15 nears, most of us are giving some attention to taxes. Even if your electrical contracting business does not have a fiscal year corresponding to the calendar year, you are planning your personal battle with the Internal Revenue Service, and hoping tax day doesn't lower your standard of living.
One of the great things about the Internet is that it contains a wealth of information about tax regulations. If you find yourself with some time to fill this winter, try browsing through www.irs.gov. You'll be surprised what is available, and much of it is useful on both a business and personal level.
For example, new business owners can pull up IRS publication 583: “Starting a Business and Keeping Records.” Even sophisticated, long-term companies may want to check records-retention policies against this listing, since IRS expects you to have records available for audits.
Speaking of audits, there is a nice four-page “Joint Audit Planning Process Planning & Monitoring Tool” for large and mid-size businesses (LMSB), with assets of more than $10 million, which outlines preliminary meeting guidelines for both taxpayer and audit team, as well as the involvement of team members and technical advisors, scope of audit, timeline, documents, and issue resolution items.
The Web site is crammed full of these kinds of publications for IRS employees, and taxpayers who read them will be much more prepared than those who stay in the dark and hope for the best.
For those who want to find the inside track on the construction industry, download the Market Segment Specialization Program training manual for the construction industry (Training 3147-123 (7-98)-TPDS No. 84851H), and you will find 161 pages of material used to train IRS employees. It's like having the playbook for the opposing football team.
On page 3-34, for example, you'll find a list of nine types of information the IRS auditors will gather when auditing a construction company, from the “schedule of contracts in process at year-end” to the “general journals by entry.” Immediately following this list are the “Suggested Audit Techniques.” If you understand the parameters under which your auditor(s) approach an audit, you'll be able to provide the information in an organized and efficient manner, and you'll be seen as a much more cooperative company. It can't hurt.
This publication also contains some helpful information on completed contracts, changing of accounting methods, and severing of contracts. The last item can be important under Section 460, in determining whether a multistage project is complete for purposes of reporting income, or part of a series of “back-to-back” agreements that make up one contract.
You'll find a section of “Miscellaneous Construction Issues” on pages 2-14 to 2-17, including useful tips on improvements to your personal residence (a potential dividend issue), unreasonable compensation (reduction of profits, or balancing of artificially low levels during start-up years?), deductibility of interest on loans, delayed billings, losses on abandoned assets, and forgiveness of bad debt. There is also a section on how the IRS views accumulated earnings beyond the “reasonable needs of the business,” for the purpose of “avoiding income taxes on its shareholders.” Since many closely held contracting companies rarely pay dividends to shareholders, it would be wise to be familiar with this section.
In a separate publication are the final instructions for Schedule M-3, Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More, required for corporations filing Form 1120.
Even if you don't have time to investigate the IRS Web site, you can use it to test the expertise of your tax preparer. The information is easy to search and locate, and the links work well. All materials are printer-friendly, and the larger publications download in PDF format. If you find the materials somewhat dry, try the educational section, and you can play games and find esoteric tax trivia to amaze your employees and friends with your vast knowledge of the tax process and its history.That should get you started, and more will follow in the second article of this two-part series. EC
NORBERG-JOHNSON, is a former subcontractor and past president of two national construction associations. She may be reached via e-mail at email@example.com.