Construction ebbs and flows like the tides. That’s why many construction business owners say: “When it rains, it pours,” and “it’s always feast or famine.” To help, here are 10 steps to consider which can bring in vital cash when work slows down, and your firm doesn’t have a lot of building projects going on.
Number 1: See if You Qualify for an NOL Carryback
Net operating losses (NOLs) are a technical tax occurrence in some personal federal (and possibly state) income tax returns, but they may be overlooked. If this happens, you might not fully capitalize on the tax advantages. This is because sometimes business losses are a last minute surprise, or your losses come from different businesses. If business is slow take a second look at your tax returns and have your tax advisor look for the opportunity to apply an NOL.
If you have income from multiple businesses, and one of them reports a big loss one year, you can write the loss off against all the income you have to report on your personal return from all your profitable businesses.
In fact, don’t let the loss “get away.” If you qualify and file a tax form with the IRS, you can carry the net operating loss back to the two previous years, which will generate a quick refund of all or part of the income taxes you paid.
Number 2: Consider Cost Segregation to Save Taxes
You know construction and real estate go hand-in-hand. If your firm owns any buildings, you can save immediately on your taxes by hiring your experienced tax professional to produce a cost segregation study on the building you own.
Construction-savvy tax professionals will separate the buildings you own for tax purposes into the component fixtures and equipment, causing what could be a huge tax benefit and cash tax savings right away.
Your current year cash tax payment could be dramatically reduced. So if business slows up in a profitable year, ask your tax advisor to conduct a cost segregation study on your buildings. This will allow you to write off a lot more now, rather than having to wait 20 or 30 years to receive the full tax benefit of building ownership.
Number 3: Check into a Sales Tax Construction Materials Credit
Some construction firms collect sales tax from their customers on repair and maintenance jobs. If this sounds like your firm, you might have something to gain that you don’t realize. The sales tax your firm collects obviously has to be transmitted to the state government.
But some state tax departments offer a cash rebate for the sales tax your firm paid on materials to construct those jobs, and allow you to reduce your sales tax payment by the amount of sales tax your firm paid when you bought materials on those jobs.
Check with your tax advisor, because if your state allows such a construction materials sales tax credit and you qualify, a little extra work in the slow season may produce a significant cash refund to help boost your bank balances.
Number 4: Uncover Possible Missed Deductions — Restatement
It may pay during slow times to go back over financial statements and tax returns from the past few years. Especially if some financial information becomes known during a relatively short time after the prior year’s tax return was filed, there is a way to recoup the cash you or your firm paid in federal or state income taxes, by restating your personal or corporate tax returns.
Ask your tax advisor during the slow season to go over with you the past few tax returns and/ or financial statements. You may find something which will generate the possibility of a retroactive cash refund and bring in some money.
Number 5: Consider a C-to-S Corporation Conversion
Many construction executives who originally chose to form their construction companies as C Corporations may find that this form of business has outlived its usefulness.
S Corporations pay less in income taxes and can accommodate up to 100 shareholders. If your company is a C Corp, you may have something to gain by making the S Corp election now, even years after your company was originally formed. In fact, by converting from a C Corp to an S Corp now, you may release accumulated net earnings which may result in an immediate cash tax refund.
Number 6: Refinance High Interest Debt
Chances are, if you look at all the interest rates on your merchant credit cards, supplier credit cards, lines of credit and loans you will find you are paying higher than market rates on some or all of your debt. In many cases, the interest rate you are paying is a lot more than the interest rate your firm would qualify for, on a traditional loan.
This is because when obtaining working capital revolving lines of credit and credit cards in the first place, it is easy to forget to check the interest rate and nobody follows up to see what you are actually paying.
However, a slow time is a good opportunity to apply for a new loan. If you get the help of your accounting and tax advisors in preparing adequately for the loan application, you will surely qualify for the best market rate of interest. Then, you can use the cash to wipe out high interest debt… and be more careful next time.
Number 7: Discover True Costs to Tighten Up Bids
As you know, construction bids are produced on some metric your firm has developed over a long period of time. Either square footage, square yards, man-hours, or per piece installed — your estimators develop some base unit for their work and then will measure the quantity of that unit, multiply it by the dollar value you have assigned to it, add overhead and profit, and… there’s your estimate.
That much you know. However, slow times are perfect for re-figuring your costs. How were your square footage rates originally arrived at? How much does one hour of a mechanic, journeyman or laborer actually cost?
You can tighten up your bids if you avoid relying too heavily on “traditional” numbers and look at your true, actual, current costs.
After all, good estimates are always based on a solid understanding of your firm’s unit costs per hour, per square foot, or per unit installed.
Number 8: Initiate Cost Containment Moves
Many costs which regularly hit your firm’s bottom line each month can be avoided. Accounting and bookkeeping staff members get used to seeing these charges and record them each month as if they belong. However, a slowdown in new construction work is a great time to tighten up the expense section of your firm’s income statement.
Recurring contracts are a big loophole in any cost containment initiative. For example, cell phones, vehicle tracking units, auto insurance policies, or anything which auto-renews or calculates on its own every month based on usage is a prime target for your efforts.
Here are some sample questions to start with:
- Are you still using that 20-yard refuse container in back of the office, or can you return it?
- Are you still tracking your vehicles on a GPS, or can you cancel that recurring charge?
- Are all of the cell phones on your bill still being used, or are you paying monthly for phones that are not in service?
Answering these questions may save you a bundle of money off your monthly recurring costs. These savings come in month after month.
Number 9: Collect Troubled Receivables
There’s nothing worse than having trouble accessing the cash your firm has already earned. When it’s slow, it’s a perfect time to run an accounts receivable aging report, and start to get honest about what is owed and who owes it. What are the oldest debts and what steps have been taken to try to collect them?
Consider engaging your accounting professional to help you by collecting on troubled accounts. Sometimes a fresh voice on the other end of the phone is enough to trigger payments, when other attempts have failed.
Number 10: Write Off Uncollectibles
Many construction executives are reluctant to let go of old accounts receivable, even way past the time those accounts are collectible. Forget about the danger; look at the cash benefit of getting honest.
Here’s the logic. Your construction firm pays income tax on the money you earn. (If your business is an S Corp, you pay the income tax personally.) Understand that income tax is not paid on money collected; it is paid based on your firm’s earnings unless your tax return is prepared with the cash basis.
So the old accounts receivable balances are actually harming your firm’s cash flows because you have already paid income tax on those earnings, and you can get that money back.
Consult with your tax advisor. Every old accounts receivable you write off now is money in your pocket in the form of cash savings. In other words, you will have less out-of-pocket income tax expense on current year earnings.