Real Estate Investor vs. Professional: Why it Matters

Real Estate Investor vs. Professional: Why it Matters

Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why does this matter? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses generally are deductible only against passive income, with the excess being carried forward. Of course the NIIT is part of the Affordable Care Act (ACA) and might be eliminated under ACA repeal and replace legislation or tax reform legislation. But if/when such legislation will be passed and signed into law is uncertain. Even if the NIIT is eliminated, the passive loss issue will still be an important one for many taxpayers investing in real estate. “Professional” requirements To qualify as a real estate professional, you must annually perform: • More than 50% of your personal services in real property trades or businesses in which you materially participate, and • More than 750 hours of service in these businesses. Each year stands on its own, and there are other nuances. (Special rules for spouses may help you meet the 750-hour test.) Tax strategies If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider doing one of the following: Increasing your involvement in the real estate activity. If you can pass the real estate professional tests, the activity no longer will be subject to passive activity rules. Looking at other activities. If you have passive losses from your real estate investment, consider investing in another income-producing trade or business that will be passive to you. That way, you’ll have passive...
Top Benefits of Working with a Construction CPA

Top Benefits of Working with a Construction CPA

Not all CPAs are created equal when it comes to the construction industry. Did you know that the construction industry is unique in that it has its own Internal Revenue Code section?  In our profession we regularly see financial statements that don’t make sense because a generalist CPA didn’t understand the complex requirements of construction accounting. In fact, frequently a lack of industry specific knowledge can actually harm a company — from understating bonding capacity and working capital, improper indirect cost allocation, or miscalculated bank covenant ratios. These inquiries can result in increased credit costs and lost opportunities. Here are some of the top reasons you should be utilizing a CPA team that specializes in construction accounting and reporting: Income is correctly calculated on the percentage-of-completion method, which is mandated as a generally accepted accounting principle. The financial statements include required contract schedules as supplementary information. The contract schedules appropriately tie to the balance sheet and income statement. Financial statements must show completed job revenue and work in process revenue that ties to total contract revenue on the face of the income statement. The same goes for costs. Correct terminology and classifications are used throughout the financial statements, much of which is unique to the industry, such as billings in excess of costs and estimated earnings (overbillings), and costs and estimated earnings in excess of billings (underbillings). Losses on uncompleted contracts are recognized in full at the time it is determined there will be a loss on a job. This is, again, mandated by generally accepted accounting principles.  It also means that the financial pain of a loss is...
Prevailing Wage Seminar Recap

Prevailing Wage Seminar Recap

A week ago I attended a prevailing wage educational event hosted by the Pacific Northwest Chapter of Associated Builders and Contractors.  Susan Wooley, a Prevailing Wage Rate Technical Assistance Coordinator at the Oregon Bureau of Labor and Industry, brought her 18 years of experience to the table to address common prevailing wage law compliance issues. The event was well attended and gave small business owners an open forum to ask questions about the interplay of state prevailing wage and federal Davis Bacon regulations, required job site postings, calculating overtime, compensating drive time to and from job sites, and filling out certified payroll reports.  I certainly learned a great deal and would encourage any ABC members, and even curious nonmembers, to attend future events.  See the ABC Pacific Northwest Chapter event calendar at: http://www.abcpnw.org/en-us/events.aspx#.   Sarah Shaw-Stahlke, CPA is a member leader of the Jones & Roth Construction Team. She has expert knowledge in the construction industry and assists clients with financial reporting for bonding and banking purposes, job costing, financial ratios and benchmarking and tax...
Top 4 Benefits of Understanding Costs – Part 1

Top 4 Benefits of Understanding Costs – Part 1

With contractors operating on smaller and smaller margins, it’s vital to be aware of your costs.  In this 4-part blog series, we’ll discuss the top four benefits of understanding costs. #1. Successful Bids Construction contracting’s life blood is based on successful bidding.  A successful bid is one that helps sustain cash flow, is profitable and helps win future business—and it is by understanding the company’s cost structure that a contractor will be able to accomplish this. The process begins with an analysis of costs that are not specifically related to one project.  Direct costs such as materials and labor are easily traceable to specific jobs, but the allocation of equipment operation and storage, or a general liability insurance policy, or the purchasing function are much more difficult costs to trace. To begin, examine the company’s past five years of financial statements to identify the major costs.  Accumulate them into costs pools such as labor burden, equipment operation, shop and yard costs, vehicle costs, insurance costs, procurement costs, and estimating and project management costs. Once the cost pools are identified, then come up with a rational allocation method for each.  This will differ depending on the size of the company and whether the contractor is a general contractor or a subcontractor, but some common allocation methods are based on labor hours, equipment hours, or total material costs on a given job in relation to all jobs. Apply the allocation methods to jobs in progress and, once complete, evaluate the results with the understanding that the very nature of the process is based on estimates, which result in a cost being either over...
J&R Construction Team to Present at AGC Summer Conference

J&R Construction Team to Present at AGC Summer Conference

Jones & Roth will present an educational breakout session Positioning the Construction Business for the Future: Exit Strategies and Succession Planning at the AGC Summer Conference Aug 6 -8 at Salishan Resort on the Oregon Coast. The annual event attracts Contractors from across Oregon and SW Washington to network with colleagues, hear from the industry and participate in a wide variety of educational...