ForConstructionPros.com

Interview by Jonathan Sweet

With the end of the year approaching, it’s time to make sure you have everything in order for the tax season. Concrete Concepts talked to Russell Wolff, CPA, with Virchow, Krause & Company, LLP, one of the nation’s largest accounting firms. Wolff specializes in tax services for the construction industry.

What tax law changes do contractors need to be aware of this year?

The American Jobs Creation Act was enacted in October of 2004 and contained a provision known as the “domestic production activities deduction.” When fully phased in, taxpayers will receive a deduction equal to 9 percent of the lesser of qualified production activity income (QPAI) or taxable income. The applicable percentage is 3 percent for 2005.

QPAI is defined as domestic production gross receipts less cost of goods sold, costs directly allocable to the receipts and a ratable portion of indirect costs. For most small contractors, the deduction will be the appropriate percentage (3 percent for 2005) of taxable income. It should also be noted that the deduction is limited to 50 percent of the W-2 wages of the taxpayer for the taxable year. This could be an issue for small contractors that do not have employees, such as a sole proprietorship. All contractors should be reviewing this provision to make sure they maximize their deduction.

Also, many contractors have taken advantage of the bonus first-year depreciation allowance that existed for the past few years. This provision expired on Dec. 31, 2004. This will have an impact on the amount of tax depreciation expense that may be available for 2005. Proper planning can help mitigate the impact of this expired provision.

Are there any changes scheduled for 2006 and beyond that they should take into consideration?