January 12, 2023May 3, 2022 by The Contractor's Accountant

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Audit-Proof Your Business

Audit-proofing your business requires dedication to the financial paperwork. To have the best outcome for an audit requires a commitment to regularly staying caught up and understanding your tax obligations.

Lagging on the paperwork and disorganization gets business owners in trouble. When business owners take shortcuts or avoid doing paperwork, the mistakes can become a big burden later on.

The best practice to audit-proof your business starts with a knowledgeable accountant and a CPA. Accountants take care of the day-to-day accounting. The CPA is a business partner that will assist your company in staying compliant with tax laws and guide your business planning and growth. Both an accountant and a CPA are very important for audit-proofing your business.

Types of Audits

Internal Audit

Internal audits are performed within the company and may be referred to as a self-audit. A self-audit can be performed at any time during the year. The end of the year is particularly important to discover transactions that may be coded incorrectly or were mistakenly entered into the wrong account. An internal audit assures every account is reconciled before preparing the tax return. It also helps to assure that all documentation is collected to complete the tax return.

External Audit

External Audits assure owners that internal processes are following Generally Accepted Accounting Procedures (GAAP) and industry standards. GAAP principles apply consistent standards to procedures to comply with established rules and regulations.

An external audit helps to identify areas to improve internal controls and regulatory compliance. External audits lend impartial credibility to the accuracy of financial records.

Normal preparation of financial statements by a CPA will not include assurance. The financial statements will not include a formal report to verify the accuracy or completeness of the statements. Financial reports without assurance are intended for the companies internal use.

Assurance

Assurance is obtained by obtaining evidence
Highest level of assurance is an audit
Level of assurance needed for financing depends on loan size, collateral, and overall risk

Compilation

Compiled statements are not audited or certified
The compilation report includes a letter from the CPA to make the CPA’s role more apparent
If the CPA is not independent, the CPA must disclose the lack of independence
Assures financial reports have been prepared following the financial reporting framework
Used by lenders for financing small amounts

Review

Performed by an independent CPA
For higher levels of financing
Provides limited assurance

Audit

Performed by an independent CPA
CPA performs verification and substantiation procedures
Highest level of assurance

Tax Audit

A tax return may be selected randomly for an audit or an audit may result because of a “red flag.”

Each year a certain number of returns are randomly chosen to be audited; they are selected by “luck of the draw.”

The IRS uses formulas that compare your return against other returns. The formula looks for normal ranges. If a deduction is not within a range for your business industry and size, the return will be flagged for a manual review.

Reasons your return may be flagged:

Missing or mismatched paperwork
Calculation and data entry errors
Rounded numbers
Self-employment
Low income with high deductions
Claiming losses several years in a row

Your return may also be selected because of an audit of another taxpayer’s return if there are transactions connected to your tax return.

The IRS looks for inconsistencies by linking payer records with the recipient records through 1099s. To audit-proof your business, always report all income.

Audit by Letter

IRS letters are sent out about 6 months after the tax returns are filed. The IRS mails the audit letter. They never communicate by email or through a phone call. If you question the legitimacy of an IRS letter, contact a tax preparer or a local IRS office to verify that is authentic. The IRS will send a letter that will have a notice number beginning with CP or a letter-number beginning with LTR located on the top or bottom right-hand corner. You can also contact the IRS at 1-800-829-1040.

Types of IRS Audits

The IRS has three general types of audits:

Adjustment letters that are sent for miscalculations
Correspondence audit that will request additional documentation
Examination audit that looks closer at records

A CP2000 notice isn’t an audit; however, the process is the same. A CP2000 notice is used to inquire about underreported income. The IRS has information showing that you haven’t reported all income on your tax return. Often, it’s for a 1099-NEC, if you are self-employed.

Responding to IRS Audit Notices

IRS notices require a quick response. Don’t ignore IRS notices, respond promptly.

If the notice is correct and you agree, then make the payment or payment arrangements quickly to avoid interest and penalties.

If you do not agree , the notice should be discussed with your CPA to determine how to respond or to determine if representation is needed. Documentation or a letter of explanation may clear up the issue if the evidence is provided to support your figures.

Always send the IRS copies, never send original documents.

In-Person Interview

In-Person Audits

Field audits take place at the taxpayer’s home, place of business, or accountant’s office
In-Office audits take place at an IRS office

Audit Etiquette

Prepare for the audit. Cooperate with the auditor and provide everything the audit correspondence asks for.

Have documents readily accessible. Neatness helps convince auditors that you are attempting to keep organized and accurate records.

Organize records in a logical order. Keep receipts flat and by date. Paper clip small receipts together to keep from losing. Organize checks by check number and invoices by invoice numbers.

Provide additional backup records with logs and calendars. Auditors will disallow deductions if documentation isn’t provided.

Treat the experience as an opportunity to improve your business.

After the Audit

Keep track of correspondence with tax agencies.
Send correspondence by certified mail.
Stay compliant by filing on time.

Burdon of Proof

All expenses must be ordinary and necessary business expenses. More importantly, can you provide a business purpose for the expense? To audit-proof your business, each transaction must have a business reason.

Ordinary expense – common and accepted for your industry
Necessary expense – helpful and appropriate

Obtain, maintain, and retain records

Records are now commonly available through online accounts
POS terminals make it easy to retrieve lost and missing receipts from the vendor

Match documentation with every transaction on the bank and credit card statements

An invoice for every income deposit
A receipt for every expense

Reconcile:

Bank accounts
Processor accounts
Savings, brokerage, reserve, trust accounts
Credit card accounts
1099’s with income
Income records with bank statements
Sales tax
Payroll taxes

A few more tips to audit-proof your business:

Never mix personal and business transactions
Avoid cash transactions
Use accounting software
Use a mileage app
File all required 1099’s and W-2s
Know the rules for deductions
Keep backup records

Audit-proofing your business requires paying attention to the financials and a partnership with an expert account and CPA. Using this approach to your accounting will provide assurance of accuracy.

January 12, 2023December 30, 2021 by The Contractor's Accountant

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Start of the Year for Your Construction Company

Are you ready to start the new year for your construction company? At the top of the list for the start of the year is getting the tax preparation done. If you have employees, you have additional tax deadlines.

Important Tax Deadlines

January 15

4^th Estimated Tax Payment Due

January 31

W-2’s, W-3’s Due
Form 940 Due
Form 945 Due
1099-NEC, Form 1096 Due

February 28

(March 31 for electronic filing)

1099-Misc, Form 1096 Due

March 15

Partnership Returns Due
S-Corporation Returns Due

April 15

C-Corporation Returns Due
1^st Estimated Tax Payment Due

Accountant compiles the companies transactions

Accountant’s Responsibility

At the start of the year, an accountant’s responsibility is to compile all of the company’s transactions for the year into reports for tax preparation. All of the income and expenses are reconciled to bank statements. Accountants have a tight timeline between the period when statements are available and when tax returns are filed.

The accountant is responsible for:

Entering Transactions
Reconciling Statements
Making Adjusting Entries
Closing out the Year
Compiling Reports
Payroll and Payroll Reports

Tax Preparation

After the accountant has made all entries for the year and reconciled statements, a review for accuracy should occur before tax preparation.

There are many options for tax preparation. Tax preparation can be self-prepared, a tax service can be used, or a CPA can prepare taxes. Tax preparation software provides a reasonably priced option for a sole proprietor. However, construction involves complex tax issues, and construction companies will benefit from the expertise of a professional.

Most tax preparers provide a checklist of items needed to prepare the tax return. Here’s a general list:

Organize paperwork at the start of the year.

Previous Tax Return
EIN, Social Security Numbers
Year-End Income Statement and Balance Sheet
Year-End Banking and Credit Card Account Statements
Vehicle Information
- Business Use, Mileage Totals
- Loan Documents
Equipment Information
- Loan Documents
- Prior Depreciation
Sales of Assets
Payroll Summary, Payroll Tax Forms
1099s
Estimated Tax Payments Made
Home Office Information

Year-End Tasks

By now, the end-of-the-year tasks should be completed. Here’s a quick reminder of the tasks on the list.

Review Accounts
Set up Tax Appointment
Make a Budget Projection
Clean up Receivables
Purge and File Paperwork
Inventory Tools and Equipment
Review Mileage Records
Review Subcontractor Status and Insurance Certificates
Clean up Punch Lists and Open Permits
Touch Base with Clients

With those tasks out of the way, you can concentrate on the upcoming year.

Kick-off the New Year

The end of the year was about getting prepared for taxes. The beginning of the year is an excellent time to organize and prepare for the busy construction season.

Review Contract Terms
Update Employee Manual
Perform Employee Reviews
Hire Employees
Improve Safety Program
Line up Subcontractors
Marketing

Review Contract Terms

Over time the size and type of projects may change, resulting in the need to revise contracts. It’s always important to watch for situations that may affect the terms of your agreements. Contracts are vital to construction companies. The start of the year for your construction company is a great time to review contracts to determine if the wording meets all the legal protections your company needs.

Update Employee Manual

Employee manuals have policies and procedures that may change over time. Laws are constantly changing and the start of the year is an excellent time to review the employee manual to reflect the changes.

If the company changes employee benefits or plans to make changes, revise the employee manual to reflect benefit changes.

Perform Employee Reviews

Employee reviews are typically done at specific milestones and anniversaries. Add the dates to your calendar for employee reviews to stay on schedule.

Hire Employees

You celebrated the accomplishments, looked at the budget, and planned for the upcoming year at the end of the year. If your construction company is in a growth and expansion stage, start planning for the next hire. Along with the employee manual, update the employee welcome packet and onboarding materials.

Next comes recruiting and training. A successful recruiting effort is an ongoing process. Employee retention in the construction industry tends to look like a revolving door. Implement thoughtful recruiting programs and provide quality training. Offer a career path that provides opportunities for growth, as a valuable tools to retain employees.

Improve Safety Program

Improve your safety program by making it a priority. To plan for the year ahead; lay out a calendar of toolbox talks, appoint a safety coordinator and implement the Safe + Sound program. Safe + Sound is a year-round program with week-long events in August.

Line Up Subcontractors

General contractors and subcontractors can establish great relationships and work well together for years. Change is inevitable, general contractors may find the need to widen the net and look for additional subcontractors.

Subcontractors can be found through online searches, trade organizations, or hosting an open house. Develop a process for qualifying subcontractors. Consider compatibility for current projects and future projects.

Subcontractor Screening

Scalability

Does the subcontractor have the capacity to provide labor and equipment?
Can the subcontractor schedule labor to accommodate your schedule?

Experience

Does the subcontractor have adequate experience?
What is the quality of the subcontractor’s work?

Portfolio

Has the subcontractor worked on similar projects?
Does the subcontractor have recommendations?

Licensing

Has the subcontractor obtained proper licensing?
Have there been any violations?

Insurance and Bonding

Does the subcontractor have adequate liability insurance?
Is the subcontractor bonded?

Safety Record

Does the subcontractor have a safety program?
Does the subcontractor carry worker’s compensation insurance?
What is the accident history of the subcontractor?

Marketing

Construction companies’ branding and marketing can be done on a reasonably low budget. Facebook and Instagram are perfect, if the pictures are good quality and captioned. Watch for comments and respond professionally. People love short videos.

A website is essential for high-end projects and the pictures must look professional. The website needs a gallery of projects and a well-written “about us.” It requires a description of the type of projects you work on and provide contact information.

Yard signs and advertising on vehicles and trailers are affordable ways to promote your construction company. Novelty items like pens, t-shirts, and stickers are fun way to advertise.

Looking Forward

The start of the year will ramp up into a busy spring before you know it. Start now to plan for a successful building season. It won’t seem like a long time, and you’ll be looking back on this year, preparing for the next one.

January 12, 2023December 13, 2021 by The Contractor's Accountant

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What Accountants do for Construction Companies

Accountants interpret documents relating to business transactions to produce a picture of the business’s financial health. Accountants, just like contractors, offer different levels and areas of expertise. Deciding on the type of accountant that is best for your construction company depends on your ability to understand accounting and the complexity of your business.

Typically, the more employees, the more complex accounting becomes; however, a contractor using subcontractors, along with having capital assets can also have very complex accounting.

Types of Accountants

Bookkeeper

Issue Invoices
Pay expenses
Record sales and expenses
Prepare reports
Run payroll

Accountant

Performs any procedure a bookkeeper performs
More experience and education than a bookkeeper
More responsibility for complex situations than a bookkeeper
Has tax training

Quickbooks Accountant

Uses Intuit Quickbooks software products
Improves skills with Quickbooks training and certifications
Offers a range of services with remote, online, or in-office options

Certified Public Accountant (CPA)

150 hours of college-level accounting
Must pass an exam
Maintains continuing education
Financial advising, tax preparation, auditing
May serve as an enrolled agent

Enrolled Agent

Must pass an exam
Must complete 72 hours of education every 36 months
Authorized by the IRS to represent taxpayers in tax matters
Tax planning, tax preparation

Payroll Specialists

Handles all aspects of payroll
Ensures compliance

Accounting for Construction

Accounting for construction is complex and involves several types of accounting: financial, managerial, cost, project, auditing, and tax.

When income and expenses are tracked to a specific project, it is known as job costing. Each project is tracked individually for profitability. Financial information gathered throughout the project is used to determine whether there is a profit or loss and used by project managers to estimate potential projects.

Accounting Tasks

Accountants enter information from documents such as invoices and receipts into accounting software and use the compiled data to create reports for business planning and taxes.

Accounting tells the story of the businesses worth and provides information needed to determine credit worthiness, profitability, and for taxation purposes.

An accountant can help an owner understand financial reports and provide them with information for budgeting, loan applications, insurance claims, job costing, and more.

Accounting Responsibilities

Receivables/Payables

Invoice clients
Pay vendors
Track income and expenses
Collections
Monitor balances

Assets/Liabilities

Track loans
Track depreciation

Reconciliations

Balance accounts
Reconcile discrepancies
Monthly closings

Financial Statements and Reports

Prepare Income Statement, Balance Sheet
File sales tax reports
Prepare budget reports

Payroll

Pay employees
Calculate deductions
File payroll reports
Pay payroll taxes

Tax Preparation

Prepare tax returns
Provide tax advice

Other

Analyze cash flow
Assist with audits
Ensure compliance with laws and regulations

Receipts

Receipts for construction companies may be obtained at the point of sale or received through email. It is now common for accountants to login into an online account to retrieve receipts.

Accountants capture information on receipts and associate it with the proper job. For that, either a purchase order system is used or the job name must be indicated on the receipt or invoice. Typically the purchaser hand writes the job name at the top of each receipt.

Purchase orders typically require a unique number for purchases. A purchase order is a confirmation for the seller to generate an order for a buyer.

If a unique number isn’t necessary, using the job name as a PO number is an easy way to identify a job for job costing.

Classifying Expenses

Tools, materials and supplies, and equipment are often misclassified, but there is a difference.

Tools
- Useful life less than a year
- Classified as an expense
Equipment
- Expected to last more than a year
- Considered a capital asset
- Is depreciated
Materials and Supplies
- Used to complete the project
- Cost of Goods Sold (COGS)

Incorrect classification affects job costing and financial reports by showing profit and assets to be higher or lower than they actually are.

Job Costing

If you want to know just how precise your accountant is, add a candy bar to your materials, and see if the accountant catches it on the receipt.

Accountants for construction companies review each line item to determine the classification. They decide whether each line item is a job cost, tool, equipment or belongs in another category unless a construction manager has reviewed the receipt and classified the items on it.

Small tools such as screwdrivers that are not “used up” on a project are treated as an expense rather than a Cost of Goods (COGS) materials and supplies. Some items such as saw blades can fall under either category depending on durability and usage. Saw blades with a short life and cannot be re-sharpened are considered COGS materials and supplies, while saw blades that can be re-sharpened and reused are considered a tool.

Purchase tools and equipment separately from materials to avoid incorrectly coding items to projects, which overstates job costs.

Work-in-Progress (WIP)

Work-in-Progress is an inventory account for projects from development until completion. When completed, the project is moved to the balance sheet and becomes a fixed asset on the chart of accounts.

Think of Work-in-Progress as a way to synchronize the cash flow for long-term contracts. It provides a value for work during a snapshot in time prior to completion.

Work-in-Progress is used to prevent overbilling and underbilling. Work-in-Progress adjusts billing for the percent of completion for sufficient cash flow throughout the entire project; this assures funds to cover expenses at the end of the project.

In-House Accountants

Accounting may be only a portion of the responsibility an in-house accountant takes on.

In-house accountants may serve as the office manager with administrative responsibilities. They may participate in project development, human resources, and miscellaneous tasks.

In a large construction company, accountants may have specific roles such as accounts/payable specialists, payroll specialists, or supervising other accountants.

January 12, 2023December 3, 2021 by The Contractor's Accountant

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Year-end for your Construction Business

The end of the year is approaching quickly, and every business owner knows that tax season is just around the corner. What does year-end mean for your construction business? It means it’s time to focus on accounting and do some organizing and planning.

Year-end review for your construction business. — Have a year-end review for your construction business.

Focus

Accounting is a significant focus at the end of the year. Like most businesses, the end of the year in construction means looking at the next year and setting financial goals. For many companies, license and insurance renewals coincide with the end of the year. If the company carries a product inventory, the end of the year is when inventory is counted to determine its value. For a construction business, the end of the year is also an excellent time to review mileage records and conduct tool and equipment inventory, counts.

Reset

The end of the year is the time to reset. Most construction companies slow down. Days are shorter, wetter, and colder, which causes delays and days off for outdoor work. Holidays affect indoor work. Jobs may be paused or scheduled to be completed ahead of the holidays. Work drastically slows at the end of the year, if not completely stopping. Use this time as an opportunity to organize and plan next year.

Accounting

For most businesses, December 31 marks the end of the fiscal year. If your company goes by the calendar year and depending on your business structure, you will be filing a business tax return either by March 15 or April 15.

Review Accounts

In addition to running a Profit and Loss Statement and Balance Sheet, ask your accountant for detailed transaction reports by account and review each account for discrepancies. Review each transaction to determine if it was coded and classified correctly and see if it has sufficient memos.

It is to your benefit to understand every transaction in your bookkeeping records. As a business owner, you are responsible for the accuracy of the information on your tax return.

Accounting mistakes may occur. Accountants may not understand all documents; most certainly, there are unanswered questions during the year. Don’t assume everything is correct and ready for tax preparation until you have thoroughly reviewed it.

Use a Certified Public Account (CPA)

An accountant is responsible for reconciling each account and making adjusting entries. If your bookkeeper doesn’t make journal entries, a Certified Public Accountant (CPA) can provide the adjusting entries. Adjusting entries are essential for showing depreciation, interest, and several other reasons.

Schedule a meeting with a CPA for an annual audit. An internal audit is a way of avoiding tax issues and keeping the accounting accurate. Small businesses can use a software program for day-to-day accounting, such as preparing invoices, check writing, and reconciliations.

Every business comes across complicated accounting transactions, which is where the importance of a CPA comes in. CPAs offer many services such as training, adjusting entries, or completely handling all accounting.

Schedule Tax Appointments

Tax planning is a service provided by certified tax preparers and CPAs. By meeting for a tax planning session before the end of the year, the business owner can plan for bonuses, retirement funding, and year-end purchases, and the business owner can strategically take advantage of lowering their tax liability.

Because of the complexity of construction taxes, hire a tax preparer with experience. A pre-tax season meeting with a tax preparer provides a way to establish a business relationship.

Schedules for the tax season fill up quickly; make an appointment for tax preparation as early as possible.

Budget Projection and Forecast

Budget projections help business owners make calculated decisions for hiring employees, purchasing vehicles and equipment, and taking out loans. The basis of the budget projection is from the current year’s numbers. Adjustments are made for each item, anticipating changes at specific periods, commonly 1, 2, 3, 5, & 10 years.

A budget forecast is a short-term budget projection, typically the next four quarters. Monthly budget forecasts can be used to help m immediate decisions. A budget forecast assembled after the third quarter is helpful when planning a year-end tax-lowering strategy.

Account Receivables

Strong policies on contracts and good collection practices for payments should keep account receivables current. The end of the year is an excellent time to review outstanding invoices and determine if any action needs to be taken.

If a small amount remains on an invoice or there is no hope in collecting, the quickest and easiest action may be to write off the account. In unusual cases, the contractor may take legal action. If payment was withheld because of a quality issue or a dispute, consider resolving the problem to recover the payment. Offer several payment options and flexibility in making the payments if possible before taking legal action.

Filing

File away paperwork at the end of the year. We can all agree that filing is usually the last task in an office we get around to. We all want to avoid it! The end of the year is housekeeping time, and it is the best time to clean up piles of paper and set up file folders for next year.

If file folders become too filled, break overstuffed folders down. A year’s worth of invoices may fit in one folder. If they don’t, break the files down into 1^st, 2^nd, 3^rd, 4^th quarters or file them alphabetically in a separate folder for each project. The same applies to the bank statement, reconciliations, and receipts, combine into one folder or break down into quarterly folders or monthly folders.

This is a sample list of labels for a start-up remodeling company. The labels for your company will likely be a variation of this list.

Organizational Documents
- Articles of Incorporation
- Operating Agreement
- Employer Identification Number (EIN)
- Initial and Annual Reports
Business License
Contractor License
Insurance (folder for each type of insurance)
Invoices
Receipts
Bank Statements and Reconciliations
Vehicle, Equipment (folder for each)
- Purchase Invoice
- Loan Documents
- Maintenance Records
Tool Inventory
Payroll Registrations
- Department of Revenue Registration
- Unemployment Department Registration
Payroll Year ___________
- Payroll Summaries
- Employee Paystubs
Quarterly Payroll Reports
Employee Folders (folder for each employee)
- Job Application
- W-4(s)
- I-9
- Reviews

Record Retention

Some records must be retained permanently. Keep records in a convenient location, such as Organizational Documents, Bylaws, contracts, legal correspondence, and meeting minutes. Retain vehicle titles as long as you own the vehicle and loan documents for as long there is a balance, possibly longer for depreciation purposes.

Payroll records must be retained for a minimum of 4 years from the filing due date or when the payment was made, whichever is later. State record retention periods vary; some states have retention periods up to 8 years.

For convenience, keep at least three years of financial documents in the office to refer back to during budgeting, in the event of an audit, for warranty issues, or a number of other reasons.

Invoices, receipts, bank statements, and canceled insurance policies can be relocated to permanent storage for safekeeping after three years. Store records in a safe locked location and away from moisture in a labeled plastic tote. Label storage containers with the contents and dates, a real time saver if you have to retrieve stored documents.

Back up records!

Recreating lost records is not an experience you want to go through. Store records in at least two locations. One of those locations should be at a location other than at your business. One option is to use a backup device such as a hard drive or flash drive and store it in a remote location. Cloud storage offers another solution.

Using a scanner to create a pdf provides an easy way to store a copy of paper receipts obtained at the point of sale and other original paperwork. Include the receipt date in the pdf file name; that helps if you ever need to retrieve the receipt.

Tools and Equipment

Since projects slow down at the end of the year, this is an excellent time to inspect and maintain work vehicles and equipment. Go through the cargo trailer and toolboxes to compare the tools and the tool inventory list. Remove tools from inventory that are no longer in good shape from wear and tear or missing tools.

The company should maintain a tool inventory for insurance purposes. A tool inventory may also be required for reporting Tangible Personal Property taxes.

Corded and battery-operated tools have serial numbers. Some tools, such as air compressors, may have two serial numbers. Record the purchase date, tool’s name, price, and serial numbers. Also, take pictures for your records.

While everything is out of the cargo trailer, reorganize and mark tools. Spray paint handles, engrave tools, or use a permanent marker to mark tools with easily identifiable markings. Marked tools make it obvious who they belong to, should a tool be mistakenly left on a job site and helps to prevent theft. In the case of theft, marked tools are easier to recover.

Mileage

Gas receipts alone won’t meet IRS requirements. Whether you are claiming actual mileage expenses or are using the standard mileage deduction, it is essential to document the miles driven. The IRS requires written proof of date, start location, starting and ending miles, ending location, and the purpose of the trip.

If employees are reimbursed for mileage, the IRS requires that the reimbursements be properly documented. Undocumented mileage reimbursements are taxable income and reported on the W-2.

Per diems and allowances have special reporting instructions. Per diems and allowances that are in excess of expenses are taxable income and reported on the W-2.

Vendors

Worker Classification

If your company relies on subcontractors, it is your responsibility to determine their classification and verify their license and insurance status. Hiring unlicensed and uninsured workers can leave a general contractor vulnerable to fines and lawsuits.

General contractors must determine that the subcontractor is an independent contractor instead of employee. The IRS assumes the subcontractor is an employee, whereas the Department of Labor looks at the employment relationship, and state agencies have their own rules. Employers control an employee’s work. Independent contractors control their work.

In 2020, the IRS added a new form, a 1099-NEC, to report payments made to independent contractors instead of reporting payments on a 1099-MISC. Businesses must report nonemployee payments over $600 unless the company is an S-Corp, C-Corp, or an LLC treated as an S or C-Corp. Payments to attorneys, including Law Firms, are reported on the form 1099-NEC.

Certificate of Liability Insurance (COI)

General contractors must verify a subcontractor’s General Liability Insurance, and if the subcontractor has employees, they must also verify Worker’s Compensation Insurance. Obtaining an ACORD Certificate of Liability Insurance (COI) is necessary before hiring subcontractors to protect against liability issues. Adding the general contractor’s company as a certificate holder to the ACORD Certificate of Liability Insurance establishes that the policy exists.

The Certificate of Liability Insurance is valid for the policy term, usually one year. The general contractor must keep track of renewal dates to ensure coverage doesn’t lapse while the subcontractor is performing work. Some insurance companies automatically send the general contractor a new certificate at renewal time, but others do not.

Your insurer will audit your records for the Certificates of Liability Insurance, so that is one more reason to request them before hiring a subcontractor and maintaining current Certificates of Liability.

Completed Projects

Review open projects for punch list items. Complete punch lists and close open building permits on completed jobs. Punch lists consist of minor items remaining at the end of the project. Open building permits can create problems for homeowners and can prevent homeowners from selling a home until the permit is closed.

Marketing

The end of the year is a great time to let clients know that you appreciate them. If you haven’t already sent your clients a “Thank You” for the work, the end of the year is an excellent time to catch up and let them know.

Get feedback on completed projects. Follow up on projects that have been on hold and check to see if clients have any new projects they’ve been considering. Let clients know that you would like to get their project scheduled before your calendar gets filled.

Celebrate the end of the Year

It’s time to celebrate the end of the year. After a year of ups and downs, the end of the year is an excellent time to reflect on accomplishments, reward employees, and take a bit of time off before the next wave ramps up.

January 14, 2023August 24, 2021 by The Contractor's Accountant

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Life Cycle of a Remodeling Business

The life cycle of a remodeling business has four phases: Development and Startup, Growth and Expansion, Maturity and Succession, and Exit. A contractor will be successful if they can navigate each phase of the business life cycle.

Plan for navigating a remodeling business. — Remodeling Business Life Cycle Plan

A remodeling business establishes itself in the marketplace during the Development and Startup phase. When the company reaches the Growth and Expansion phase, workflow processes are efficient, and the company embraces growth opportunities. In the Maturity phase, the company is well-established with a stable client base. The final stage of the business life cycle is the Succession and Exit, when the company is passed to a future owner or closed.

1. Development and Startup

The Development and Startup phase includes pre-planning and launch. It is the period from inspiration through getting the business up and running. Before becoming a business owner, learning the trade through training, work experience, or a combination of both is essential. Building a solid foundation is crucial to moving into the Growth and Expansion phase.

Business Name and Formation

The company name is chosen during the Start-up phase of the business.

The business name should:

Be descriptive
Uniquely yours
Memorable
Easy to spell and pronounce
Conform to state naming rules

Perform a name search through a search engine screening, your state’s Department’s Secretary of State, and the United States Patent and Trademark Office. Choosing the name of the business is an important step. It can be a time-consuming process to go through a business name change.

Limited Liability Companies (LLC) and Corporations register with the Secretary of State. Check with your state’s Secretary of State for business formation requirements. You may need to consult an attorney to determine the correct formation for your situation and to assist with the registration.

Contractor registration and licensing requirements vary by state. In some locations, registration and licensing are at the local level.

Start Up Assistance

A business plan is used to provide guidance and direction for a company and required to obtain a business loan or grant. A business plan template is available through the Small Business Administration. The SBA has two types of business plans: a detailed traditional business plan template and a lean startup business plan which concentrates on crucial business plan components.

Assistance is available for startup businesses. The U.S. Small Business Administration (SBA) administers assistance through Small Business Development Centers. There is a network of over 900 Small Business Development Centers offering counseling, training, and technical assistance. This cooperative effort is between the private sector, educational, community, and federal, state, and local governments operating with a lead organization in each state that coordinates with community subcenters. A great place to start is with SBA and Score.

Score is an SBA partner with chapters throughout the U.S. They offer individual help for business startups by providing business plan writing, marketing assistance, and a mentorship program. Support is also available through the unemployment department, library, and other organizations in your community.

Enlist Professionals

A key person in the business will be a qualified accountant. Checks and balances are the process and procedures set in place to keep everyone accountable and assures no one has total control. A CPA can perform a year-end review to access accounting performed in-house. Proper accounting involves adjusting entries to match the tax return. This step consists in making general journal entries to close out the year. A skilled bookkeeper can make the entries, or a CPA can provide adjusting entries to the bookkeeper.

An attorney serves a vital role in avoiding liability issues. An attorney can assist with the business formation paperwork. They can draft contracts and lien paperwork and deal with collection problems.

Develop a Brand and a Niche

Find a niche in an area where you are comfortable and capable of performing high-quality work. Differentiate your company from others by becoming an expert in a particular area.

Market to the types of jobs that you want. Providing a specialty helps to define how and where to market. A fence and deck builder might seek pre-fabricated homes, landscapers, or developers. A remodeler may find trade shows and community involvement are the best way to market.

2. Growth and Expansion

Scaling a remodeling business for growth and expansion requires planning and investing. The remodeling business is establishing itself in the market. The number of projects is increasing, and the company is growing. Expansion needs to be systematic and strategic. Working with an accountant to plan for incremental growth will help maintain proper cash flow.

Client relationships are developing in the growth and expansion phase, and scheduling may challenge the company. There may be a need to add office staff and management positions. This growth may require moving into a larger office space and upgrading equipment leading the company to seek out loans.

Cash Flow

Cash flow represents the money coming into and leaving the business. The timing of project schedules, payroll schedule, and expenses affect cash flow. Projection, budget, and job costing reports help to forecast cash flow. The management of cash flow requires regular monitoring.

Control cash flow with a solid contract with clear payment terms. A deposit on contracts is typical. The deposit is a flat amount or a percentage charged to pay for costs, such as materials, before beginning work on the project.

Include a due upon completion clause in the contract. If the project is over an extended period, set up progress payments at regular time intervals or stages; accepting payments by credit/debit or PayPal can help to prevent collection delays.

Collecting Payments

Tips for collecting payments:

Determine the payment method before the beginning of the project and communicate payment timelines.
Require the final payment to be paid upon the completion of the project or within a short timeframe, such as three days.
Avoid dealing with delinquent customers and unpaid balances by offering an electronic payment method.
Mechanic’s Liens offer a mechanism to collect unpaid receivables. There is a legal procedure to file a lien, which varies by state. The first step to a Mechanic’s Lien is a Preliminary Notice providing the client information on their rights. Correctly filing paperwork for a Mechanic’s Lien allows for a lien against the property for failure to pay.

Growing Incrementally

Expenses may outpace revenue if growth is not controlled. Adding employees adds to the company’s indirect expenses for training, insurance, administrative costs, and more. A company must weigh whether there is enough work to support an additional employee and the potential for a slowdown. Allowing overtime or hiring temporary employees may be a better short-term solution.

Minimize Cash Flow Issues

Cash flow is the timing of the money coming into and leaving the company. A properly estimated job should bring in the revenue needed to cover expenses. However, because of timing, outgoing costs may be due before receiving payment for the work.

Minimize this issue by taking advantage of credit lines for materials. Lumberyards may allow until the 10th of the following month to make payments. Lumberyards may even offer a discount for paying early.

A business credit card helps to build the credit score for the business. Use credit cards effectively by paying balances by the due dates to avoid paying interest.

Reinvesting

Equipment is one of the best investments a remodeling business can make. Having proper equipment makes work more efficient and improves the balance sheet. Equipment is a fixed asset for the company with tax advantages.

Saving

Like personal finances, a business should establish a strategic and diversified approach to saving to cover emergencies. Liquidity is the ability to meet expenses with readily available funds, mainly cash and short-term investments. By building a contingency fund, money will be available to help to cover unexpected cash flow issues. Lenders use liquidity to determine creditworthiness.

3. Maturity

Maturity is the stage of the business lifecycle before the owner retires. The company has weathered ups and downs in the economy and is seeing another generation of workers moving up. The remodeling business has established its brand at this stage of the business life cycle, and revenue is dependable and predictable. As an owner, if you planned right, you’ve delegated tasks and established a retirement plan.

4. Succession and Exit

After a career of fixing homes, the day has come; it’s retirement time—no more demands from customers, subcontractors, and all the government agencies.

Wrap up commitments:

Finish jobs in progress
Collect final payments
Make final payments to employees and subcontractors
Pay taxes
Cancel insurance

A sole proprietor can close business checking accounts after all transactions have cleared the bank. They will close out any registrations with the state and file a final tax return. If there are employees, a qualified accountant or payroll specialist can assist with completing the final filings and paperwork.

Filing Articles of Dissolution with the state will end a business entity. An LLC, partnership, or corporation will refer to the Operating Agreement for the succession, transfer, and exiting procedures. The company should consult an attorney if it plans to shut down, sell, or transfer ownership.

The IRS guides the final steps for closing a business. Click here for the IRS steps to fulfill federal tax obligations.