Wiss & Company LLP IMPACT 2015 · 2019. 9. 4. · Wiss & Company LLP IMPACT 2015 May 5, 2015 | Caesars, Atlantic City Presented by: Jerry J. Killian, CPA/ CCIFP . Information provided

Wiss & Company LLPIMPACT 2015 May 5, 2015 | Caesars, Atlantic City

Presented by: Jerry J. Killian, CPA/ CCIFP

Information provided by Wiss & Company in this document is intended for reference only. The information is designed solely to provideguidance, and is not intended to be a substitute for someone seeking personalized professional advice based on specific factualsituations. Although Wiss & Company has made every reasonable effort to ensure that the information provided is accurate, Wiss, andits partners, managers and staff, make no warranties, expressed or implied, on the information provided. The reader accepts theinformation as is and assumes all responsibility for the use of such information.

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State of Construction Economy

Financial Statements Sample Financial Statements

Common Problems in Financials

Revenue Recognition Changes

Federal Taxes & State TaxesAccounting Methods

DPAD

NJ Sales Taxes

Q&A Session

AGENDA

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About Wiss• 30 Partners

• 5 Offices- Livingston, Iselin, Flemington,

New York City, Bethlehem PA

• 175 staff

• Top 10 Accounting Firms in New Jersey

• Serving privately held companies for over

40 years

• Rated one of New Jersey’s Best Places to

Work by NJ BIZ

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Wiss Construction Services

• Offers construction specific accounting, audit,

tax and consulting

• Delivered by a group of professionals dedicated

to the Construction Industry

• Jerry Killian: Partner-in-Charge

• Other Partners– Brian Reingold, Alex Narcise,

Edward Townsend, Michael LaMotta

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Wiss Construction Services

Construction Clients

• Primarily in New Jersey and New York

• Range in size from $5M to $500M in

revenue

• Majority of clients in $10-$75m sales

• All family owned businesses

• Building, Heavy, Highway, Marine and

Subcontractors

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State of the Construction Economy

ENR reported recently:

• Construction starts increased at a 10% annual rate

• Construction activity is at its highest level

• Non-residential building particularly in the institutional,

chemical & energy related areas

• Single family housing is sluggish but multi-family is on the

uptick

AGC reported recently:

• Contractors are having difficulty finding qualified workers to fill

positions and growth

• Craft positions needs – carpenters(66%), roofers(64%),

plumbers(54%), equipment operators 59%) and more

• Professional needs – Project Managers (48%), Estimators (32%)

down to Accountants (5%)

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AGC recently reported:

• Labor shortages varies by region

• Gulf Coast Zones – biggest demand, especially in

Houston area

• Construction Employment increased in 39 States

from September 2013 to September 2014,

decreased in 10 states and flat in 3 states

• Florida added the most jobs (42,000) followed by

California (38,000) and Texas (32,000)

• Largest Percentage and total losses occurred in

New Jersey (-11,200 / 8%), Arizona (-7,600/6.2%)

and West Virginia

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ACCNJ Reported recently:

• Construction employment up in 236 of 339

metro areas

• New Jersey metro areas continue to struggle for

most of 2014

• Edison/New Brunswick came out in the bottom

of the worst 5 –down 7%

• Other areas down are Atlantic City (5%),

Newark/Union (5%)

• Camden had the highest increase

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Construction Industry is:

• Flat to down in New Jersey

• Up in New York City

New Jersey has been on the bottom of the list of

recovery in the construction industry

• Casino industry construction down to almost

nothing

• Turnpike $2.5 billion expansion is all done (Exit 6-9)

• Typical NJ Road / utility contractor is changing

• Sales to international companies

• To survive, moving into specialty work – PSEG Energy

Strong Program

• Competition for public work is fierce

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• Volume of work for commercial building

contractors is up in 2014 but margin % have

not improved

• Most work is larger projects from hospitals,

universities; smaller work from bank change-

overs

• In New York, building construction is on the

rise primarily in the high-rise residential sector

What the WISS Construction Services Division sees:

Commercial Building Contractors & Subcontractors:

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• Most building contractors and subcontractors

are beginning to build some backlog and the

2014 financials show a better backlog at

12/31/14

• Expectation for this sector is that this is the

“New Norm”

• Hurricane Sandy – Generated activity for

certain building contractors – but mostly in

the residential and infrastructure markets



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• On the positive side:

- We have small group of building

clients that are growing / profitable

- Niche work – Banks, power, energy

- Out of state work – NYC / other select

states



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What We See:

Heavy Highway Contractors:

• Work bid continues to be extremely competitive

• 16 bidders on public jobs

• A number of projects are very large - $1 billion plus

– only able to be bid by largest contractors

• Tappan Zee Bridge

• Goethals Bridge

• Bayonne Bridge

• Joint Ventures on the rise because of this

• P3’s – Public / Private / Partnerships slow to take

hold in NY area (Goethals has private investor for

$500m)

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What We See:

Heavy Highway Contractors

• Consolidation over the past 5 years of

many major contractors – all now with

foreign owned parent companies

• Competing against each other!

• Other foreign and out of state

contractors still coming in and bidding

work in this area

• Margins still remain at historic lows!

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What We See:

• As construction market slowly

improves, bigger demand on cash

flows

• Owners paying in 45-60 days

• Unions want union benefits in some unions

– weekly

• Suppliers want to get paid in 45-60 days

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What We See - BANKS:

• For the first year in at least 5 years, we see

Banks:

• Willing to loan to contractors

• Willing to provide increased lines of

credit

• Willing to loan on equipment purchases

• Rates are extremely competitive

• Working with construction contractors on

better cash management programs

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What We See – Surety Companies:

• Surety Companies continue to write bonds

for most contractors

• Surety losses at 35.6% - slightly up from

2012 lowest in a number of years

• A lot of capacity in the market place

• In less competitive times, a number of these

companies may not be getting bonds

• Fuels the competition on project

• 2014 Prediction is Flat Premiums and

increased Loss Activity

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What We See – Surety Companies:

Premium Written: 2008 = $700B

Premium Written: 2012 = $579B

• New Players entering the marketplace

• “Unregulated” sureties entering the

marketplace- for smaller contractors

• Sureties are struggling with longer

term warranty bonds being required

by many owners (10-20 years)

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Overall Industry Outlook (FMI) – NationalGrowth 2014

Residential - Single Family +18% Multi Family +27%

Commercial +7%

Healthcare +2% (5% predicted in 2015)

Educational +3%

Power +9%

Manufacturing +5%

Lodging +13%

Heavy / highway +7%

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Financial Statements

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Contractor Financial StatementsWiss Example Construction Company, Inc.

Wiss Example Specialty Construction Co., Inc.

A full set of contractor financials statements should include the following items:

• Auditors or accountants report• Balance sheet• Statement of income• Statement of changes in equity/capital• Statement of cash flows• Footnotes to the financial statements• Supplemental information (actual schedules may vary):

• Schedule of gross profit

• Schedule of contracts in progress

• Schedule of contracts completed

• Schedule of costs of construction

• Schedule of general and administrative expenses

• Consolidating schedules, if applicable

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Common Financial Statement Errors

OVERARCHING PROBLEMS:◦ Variable interest entities not consolidated with operating entity

o The guidance introduced in FIN 46(R) (now ASC 810) required many related entities to be consolidated in the financial statements of construction contractors.

o Common VIEs are real estate entities, equipment rental companies and joint ventures.

◦ Wrong Opinions are used in financials (new audit or review opinions effective in 2012)

◦ Additional information opinion is a “disclaimer”

◦ Adequate disclosures missing including:

◦ Method of Accounting for long-term contracts

◦ Has the policy for claims been disclosed?

◦ Costs and estimated earnings on incomplete contract disclosure reconcile to the work-in-process schedule

◦ Retirement plans multi-employer pension footnote

◦ Liquidity and capital resources note if there has been significant losses or events – what is management’s plan for dealing with them?

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Common Problems Job Costing

•Costs (General Ledger Accounts) should be separated into:

• Direct Contract Costs (Charged Directly to Job)

• Indirect Costs (Allocated to Job based on rational method)

• Equipment Pool Costs (Allocated to Job based on usage)

• General & Administration Costs

Many times we see indirect / equipment mixed in with G&A Costs

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Common Problems Job Schedules

•In- Progress and Completed contract schedules are not reconciled to:• Revenues• Costs• Gross Profit

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The New Revenue Recognition

StandardREVENUE FROM

CONTRACTS WITH CUSTOMERS

Is this a big deal?

When did this project start?• 2002

When do the standards become effective (New Delayed Date)?• Public companies: 2018• Non-public: 2019

Revenues of a company are probably the most significant and sensitive component in most financial statements.

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What are the new standards?Core Principle:

“An entity recognizes revenue to depict the transfer of promised goods or

services to customers in an amount that reflects the consideration to which

the entity expects to be entitled in exchange for those goods and services.”

In conjunction with this core principle, the standards outline a 5 step process

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5 Step Process to Recognize Revenue

Identify the contract with the customer

Identify the performance obligations

in the contract

Determine the

transaction price

Allocate the transaction price to the

performance obligations

Recognize revenue as

each performance obligation is

satisfied

1 2 3 4 5

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Construction Industryo % of completion has NOT been eliminated

o Cost to cost can still be used to measure progress

o Not every contract will have multiple performance obligations, but the big change is that many will

o For construction contractors,uninstalled materials that areunder the control of thecustomer may be able tohave revenue recognizedon them

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Construction Industry- Percentage

of Completion

o Under the new standards only costs which specifically relate to the transfer of goods or services are used (many pre-construction costs will need to be expensed as incurred and not included in the percentage of completion calculation)

o Costs associated with contractor caused inefficiencies should be excluded and expensed as incurred

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How should I approach this?

AICPA Learning and Implementation Plan – October 2014• Understand the changes to the standards• Understand your transition options and

determine how your company will adopt the new guidance

• If necessary, find resources to help train your staff

• Educate users about the changes they can expect to see in the financial statements

It’s never too late to _________________

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Federal and State Taxes

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Tax Accounting MethodsContractors that continue to grow need to aware of required conversion to percentage of completion (IRC Sec 460)for “large contractors”

Large Contractors = Greater than $10m of gross receipts for prior 3 years (as shown on tax returns)

If current method is cash or some other method and gross receipts exceed $10m:◦ Contracts entered into the current year - long term contracts will be on % of

completion method◦ Base method is whatever method you were using in the past , i.e., cash◦ Can elect to only report “long term contracts” on percentage of completion and

keep all “short term contracts on the base method◦ Form 3115 needs to be filed with tax return – automatic in year of change

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Domestic Production Activities Deduction (DPAD)Still see a number of contractor companies not taking advantage of this• Taxpayers may claim a deduction on Form 8903 for 9%

beginning in 2010• Deduction on lesser of “qualified production activities income”

or taxable income• Activities that qualify include construction, engineering,

manufacturing, architects• Deduction is limited to 50% of the W-2 wages of the employer

for the tax year• If less than 5% of your activity is from other income this is

considered “de minimis” and you still qualify for the entire deduction

• State consequences can vary significantly – NJ / NY does not allow contractors to take this deduction

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Bonus Depreciation / Section 179 write off

No Extension as of yet for 2015:

50% bonus depreciation (NJ does not allow)◦ Available to all companies regardless of size of investment (new

equipment)

Section 179 deduction for expensing purchases of $500,000 –currently at $25,000◦ Limitation on purchases of $2,000,000

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New Jersey & Sales Taxes

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New Jersey Sales Tax Audits on the Rise

Be on the defensive:◦ Know what exemption certificates are required and make sure you

have them◦ For both sales and purchases

◦ When you receive an audit notice – don’t panic – Call in an expert◦ Many “findings” by the State Auditor are not correct – they do not

know the sales tax laws for contractors / aggressively mis-interpret the laws

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Sales Taxes

New Jersey Sales Tax Laws –

-Tangible property is taxable

unless specifically exempt-

-Services are exempt unless

specifically enumerated as

taxable

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Sales Taxes

– Contractors are required to pay sales or use taxes on

materials, supplies, equipment and personal property

except for exclusive use of performing work for:

– Exempt Organization

– State of NJ or any of its agencies (includes Schools)

– US government or any of it agencies

– Non-profit organization (churches, charitable, fire companies)

– Urban Enterprise Zone business

– Qualified Housing Sponsor

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Sales Taxes

One exception - Construction Equipment

◦ Purchase, lease or rental of equipment is subject to

tax regardless if working for exempt organization

Rental of Equipment with an Operator

◦ Not considered rental of equipment

◦ Should document using subcontract agreement

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Working for an Owner

Typical Scenario of Contractor working for an owner (Not

Exempt)

1. Contractor (prime contractor) obtains fully completed ST-

8 from Project owner (within 60 days of signing contract)

2. ST-8 exempts owner from being charged sales tax on

entire invoice

3. Contractor pays sales taxes on materials and rentals on

the project.

4. Contractor (Prime) hires Subcontractors – No special

forms or documents needed from Prime to Sub

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Out of State Purchases by Contractor

Materials purchased out of state and

delivered to NJ are subject to 7% NJ tax

If other state tax was paid and was less than

7%, difference due NJ

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Subcontractors

Subcontractor subject to same sales tax on material

purchases/ rentals as would a Prime Contractor

Subcontractor should indicate relationship “sub to

prime” on invoice

Prime is responsible to determine if sales tax is to be

charged to property owner

Subcontractor who performs taxable services for a prime

contractor does not bill the prime contractor for sales tax on

“labor portion of bill” (Subcontractor Exceptions)

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Subcontractor Exceptions to No Tax

Landscaping Services

◦ Seeding, sodding, plantings, tree removal, and

clearing/ filling land associated with taxable

service

Carpeting and Floor Covering

◦ Carpet, hardwood, tile, other floor covering

Security Systems

◦ Hard wired security, burglar or fire systems

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For these subcontractor services, sales tax must be charged

on the “labor portion” of bill (assuming that tax was paid on

materials

“Labor Portion” = Total bill less material cost for which sales

tax was paid. Includes labor, overhead, profit, etc.

If subcontractor does not break out materials portion on

bill, then sales tax must be charged on entire bill

Best to have this information detailed on bill, next best

would be to have it detailed in subcontract

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Example- Sub Bill to Prime Contractor:

Install tile floor in lobby:

Materials $ 5,000.

Labor and other $10,000.

Sales tax on labor $ 700.

Total Invoice $15,700.

If no breakout, then invoice would have to look like:

Total Contract Amount$15,000.

Sales tax $ 1,050.

Total Invoice $ 16,050.

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Special Issues:

◦ Many services are bundled by subcontractor, (i.e.., tile contractor

that also tiles the floor, ceiling and walls)

◦ Need to break out what is taxable and what is tax exempt

◦ Certain subcontractors will not bill sales taxes because it is included

in their lump sum bid– up to GC to properly document this

◦ Certain Prime contractors in NJ tell Subs not to bill sales tax, they

“bill owner” in break out in AIA. In this case, Prime will need to

send sales tax to NJ

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Other Purchases not taxableunder ST-8 Scenario

• Garbage Removal and Sewer Services – exempt from sales taxes if performed on a regular contractual basis for a period of not less than 30 days

• Professional services – exempt from Tax – i.e., architects, engineers, testing services, etc.

• ST-4 Exempt Use Certificate Purchases – Certain equipment is exempt from NJ tax. Typical Examples are:• Solar Panels• Equipment used in the manufacturing process / research &

development• Recycling equipment• Utility Company work

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Resale Certificates are never used by a Contractor

RESALE Certificate – ST-3

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State of NJ, US Government or any of its agencies or political subdivisions (counties / towns), Public Schools◦ No exemption certificate required◦ Purchase Order or contract is sufficient to establish tax

exempt status

Certain Non-Profit Organizations which have exempt state by State of NJ – churches, charitable organization, fire companies, private schools ◦ Required to obtain Form ST-5 to document the exemption for

Sales Taxes

Urban Enterprise Zone Enterprises – Issued when building project is in Urban Enterprise Zone◦ Required to obtain UZ-4 from Enterprise or UZ- 5 – SB – Issued

by Urban Enterprise Zone Small Business Enterprise

Exempt Owners & Certificates

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All Materials directly incorporated into the project- “items of tangible personal property purchased by a contractor for incorporation into property as a physical component of such property”◦ Exemption includes 3 trades taxable under ST-8 ◦ Construction Supplies – “items of tangible personal property

consumed in the fulfillment of a construction contract, which items do not become a physical component part of the property upon which work is performed”.

What Materials, Supplies and Services are Exempt?

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ST-13 – Contractor’s Exempt Purchase Certificate

Issued by Contractor when purchasing materials, subcontractor, supplies or other exempt services

Use when working for Exempt Organization other than UEZ Entities

UZ-4 Contractors Exempt Purchase Certificate –Urban Enterprise Zone or UZ-5 SB)

Can only obtain this certificate from the Qualified Business

Exemption Certificates to be Issued by Prime / Sub for Exempt Purchases

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Documents

Wiss & Company LLP IMPACT 2015 · 2019. 9. 4. · Wiss & Company LLP IMPACT 2015 May 5, 2015 | Caesars, Atlantic City Presented by: Jerry J. Killian, CPA/ CCIFP . Information provided