Marcum 2021 Year-End Tax Guide

Year-End Tax Planning for Contractors Construction contractors have exceptional tools available to them to reduce or defer taxable income. The procedures described below can assist contractors in lessening their tax burden. WHERE TO START The planning process starts with examining taxable net income from year-to-date operations. Contemplate any possible situations that could impact your financial results. This includes items that are uncertain and, therefore, subject to potential adjustment. Consider various alterative results. Look at documentation from the prior year and see what adjustments were made at year-end. Check contract cost estimates and allocations for any pending changes to contracts that may be “gaining” or “fading” when compared to the initial gross profit estimates. TAX IMPLICATIONS FROM LAST YEAR Many basic tax considerations for 2021 are the same as in 2020. Reserves, allowances, and other non-deductible accruals and deferrals will often roll from year to year. Contract or accounting methods from the prior year typically will impact the results of operations as well. Other potential deductions that carryover from the prior year’s tax return accounting method include net operating losses, limited charitable contributions, AMT credit carryforwards, and similar deductions. When reviewing the current and prior year tax returns and operations, contractors should also perform look-back and gain-fade analyses. The look-back analysis is an “as if” recalculation of a contractor’s taxable income based on the actual performance of completed

jobs. There can be tax ramifications in the form of taxable income and interest for projects that perform considerably better than initially projected. THE CARES ACT CARES Act provisions that are still applicable include: • The forgiveness status of Paycheck Protection Program (PPP) loans should be known by the end of 2021. Forgiveness is not taxable for federal (and most state) taxable income purposes. However, if the loan needs to be repaid, the interest will be deductible. • In regards to the Employee Retention Tax Credit (ERTC), the IRS has issued guidance clarifying that employers claiming the credit are required to reduce their deductions for employee wages by the amount and in the year of the credit received. This could have an impact on a company’s qualified business income deduction. • Food and beverage will be 100% deductible if purchased from a restaurant in 2021 and 2022. In addition, the CARES Act’s suspension of some of the Tax Cuts & Jobs Act (TCJA) rules will end for tax year 2021, including: • The limitation on deducting excess business losses for non-corporate taxpayers. • The limitation of 80% of taxable income applied to all net operating losses (NOLs) for tax years ending after December 31, 2020.

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