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.
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.
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.
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.
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.
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.
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 1st, 2nd, 3rd, 4th 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)
- 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
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.
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.
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.
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.
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.