Accountant Joe Molloy has eight brothers and sisters, and he prepares taxes for all of them. It’s not as much work as it sounds, he says. He need not apply the full arsenal of tax rules and loopholes to his siblings’ tax returns because none of them operates complex business enterprises.
This is not the case for clients at his day job. Molloy is the Principal of Construction Taxation at Grassi & Co., a New York City accounting firm. He oversees the preparation and review of tax returns for Grassi’s construction industry clients.
Molloy jokes that he only talks to his siblings during tax season. But if you are one of his construction contracting clients, he would like a considerably closer relationship.
“Quarterly visits are the best approach. If anything’s changed, if there’s a bad contract, we can plan around a bad contract,” Molloy explains. “Make sure there are no surprises.”
It takes cash to keep a construction operation going, and tax bills reduce liquidity. So Molloy advises construction contractors on how to organize their accounting systems and tax strategies to maximize cash flow.
“The more cash they can have on hand the better for day-to-day operations,” Molloy said. “Why pay tax ahead of time when you don’t have to?”
Many contractors use straight accrual accounting, so they pay tax as receivables and payables roll in. But the moment a receivable is recorded is not necessarily the same moment that the cash has come in the door. So tax could be due, but the cash to pay it has not arrived.
Using cash basis accounting or completed contract accounting solves the problem by aligning the availability of cash (when it comes into the business) with the due date of a tax bill.
Molloy said the 2017 tax reform passed by Congress and signed by President Donald Trump has expanded the ability of contractors to use cash basis and completed contract accounting. It raised the threshold eligibility for these accounting methods, up from contractors with $10 million average annual gross receipts for the last three tax years to contractors with $25 million a year average annual gross receipts.
Tax deferral is another method for improving your tax position. When contractors experience a high backlog with profitable jobs, they are subject to a tax bill. If tax payments can be deferred on that windfall for years—as they often can—and the contractor suffers a loss from a unsuccessful project in the meantime, the loss can be set against the windfall, lowering or eliminating the ultimate tax bill.
Molloy points to tax credits as the most lucrative benefits in the tax code. For example, a $1,000 tax deduction reduces the amount of taxed income by $1,000; if the income tax rate is 35 percent, then the tax bill goes down by $350. Qualifying for a $1,000 tax credit, meanwhile, reduces the tax bill by $1,000.
Molloy cited the fuel credit as one that contractors often fail to take advantage of. It reduces tax for non-highway use of gasoline. This applies to operators of machines such as compressors, rock drills and crushers and generators.
Molloy held out the research and development tax credit as the gold standard of construction credits—because it’s worth the most gold. Subcontractors on a construction project—plumbers, electricians, and HVAC technicians—are tinkering and testing new systems and operations. It is these subcontractors more often than general contractors who are the beneficiaries of the R&D credit, Molloy said.
“The biggest missed credit is the research and development credit, and that is a wage-based incentive for a new and improved product or process,” Molloy said. “If anyone is doing some value engineering, they most likely are doing R&D eligible tax credits.”
Contractors can apply for the tax credit by reporting the cost of labor used to create the innovation as well as continuing work to improve the innovation. This credit is available for 100 percent of the labor cost allocated to the Research and Development process and has no limit, Molloy said. He also noted that a 2015 tax change widened the credit’s availability, so contractors who did not qualify in the past should check with their tax advisor.
As you can see, getting better acquainted with your tax accountant has its benefits. And you don’t even have to invite them to dinner.
Joseph Molloy is the Principal of Construction Taxation at Grassi & Co. In this role, he is responsible for overseeing the preparation and review of tax returns for clients in the Construction Industry. Molloy is proficient in all areas of tax including projections, preparations, reviews and correspondence. He has an especially strong understanding of code section 460 – special rules for long-term contracts, which he uses to help clients create and maintain tax deferral strategies, thus enhancing their financial position. Joe also has extensive experience preparing tax returns for a variety of entities, including C-Corps, S-Corps, partnerships, Individuals and trusts.