One of our major areas of expertise is the construction industry. Many of our clients operate successfully in this industry, and we help provide tools for them to succeed.
Construction companies have some unique challenges and opportunities – from a tax perspective as well as from a general business perspective. In this industry, it is easy for business owners to be so busy working “in” the business – running jobs and managing crews – that the high level business issues can sometimes take a back seat. These issues are important in order to keep a company healthy as it grows, and this is where we add value.
You may notice that your income fluctuates significantly from one tax year to the next. This can result in unpredictable tax burdens at the end of the year, and cash-flow shortages during periods when there are large amounts receivable not yet collected.
A somewhat unique “tax planning” option for construction companies relates to holdbacks. If there are significant amounts receivable in holdbacks at the end of the year, these amounts can be excluded from income, often resulting in a “smoother” and more accurate income on a year-to-year basis and financial results that can be more easily interpreted.
Job Costing and work-in-progress
As many contractors know, it is important to track revenues and expenses related to each major job in progress at any time. For tax purposes, this is how we can determine whether there is “work in progress” at the end of the year. Recording revenues from work in progress in the year the work is done is another way to smooth income for tax purposes and create more accurate and reliable financial reports. Job costing also allows you to easily analyze which jobs were profitable and not profitable during the year.
The transition back to GST from HST on April 1, 2013 is a major issue this year for many construction industry companies.
One issue is that it can sometimes be unclear whether GST or HST should be charged on sales.
For new home builders, there is a transitional tax of 2% to consider. If this tax is not charged correctly to customers, the company could be liable for the amount itself. The rules around when this tax is payable relate to the dates that various stages of the work were completed. In certain cases, there may also be a refund of a portion of this tax available.
If you held inventory on the transition date which you have paid HST on (and collected the HST back from the government), you may need to self-assess PST on the sale of this inventory once it is used.
Other areas where we often provide value to our construction industry clients include:
– Lease vs buy decisions
– Tax strategies for protecting assets and splitting income
– Budgeting and cash flow management
– Understanding how to analyze reports on profitability during the year
– Hiring decisions related to financial administration
– Bonding compliance
– Percentage completion/completed contract methods of accounting
We have extensive experience helping our clients with the transition to GST, connecting construction clients to bookkeepers who know their industry, and providing valuable and comprehensible business and tax planning specifically tailored to our clients in this industry. For more information feel free to connect with us any time.
Written by: Chris Brien, CA