Marcum 2021 Year-End Tax Guide

YEAR-END PROJECTION Once you know where you stand currently, know where you’re going next. This might include jobs you are considering or initiating, contracts that might be completed by year-end, possible purchases, and any other significant factors or business decisions. Use all of the aforementioned information to develop a projection for the rest of the year. Will the remaining months be better, worse, or the same as year-to-date operations? Contemplate prior year projections, the current year’s budget to actual results, budgets on recently completed contracts, and any forecasts for the current year. NEW GOVERNMENT INITIATIVES Washington is constantly responding to changes in the economic climate. Last year, the COVID-19 pandemic and related impact on the nation’s economy led to a number alterations in the tax code, most notably the passage of the Coronavirus Aid, Relief & Economic Security (CARES) Act in 2020. 2021 is no different, as we’ve seen the Consolidated Appropriations Act and the American Rescue Plan Act pass early in the year. Congress continues to deliberate the passage of a trillion dollar infrastructure bill. It is imperative to consider any recent, pending, or potential changes in tax law that may impact your current year’s tax plan. There is pending legislation that, if enacted, will have wide-ranging impacts. A few highlights from the outstanding Build Back Better Plan proposal include the following: • A possible increase in the corporate tax rate (currently, a flat rate of 21%). • A possible increase in tax rates for individuals, from 37% to 39.6%. • An additional 3% surcharge on earnings in excess of $5 million (or $2.5 million if married filing separately) for individuals. • Various changes to deductions and limitations. ESOPS AS AN EXIT STRATEGY Thinking about hanging up your safety helmet? The looming tax changes coupled with strong valuation multiples is creating a compelling case for business owners to consider selling to an Employee Stock Ownership Plan (ESOP). For those not quite ready to exit the business, it is imperative to consider an exit strategy. TCJA introduced a doubling of the lifetime exemption (for gifts and estates) to $11.7 million for

2021 per individual. This is still the current exemption and is set to expire at the end of 2025. However, many proposals in recent legislation seek to reduce this exemption or eliminate it altogether. Consult your Marcum tax advisor about the potential benefits of an ESOP as an ownership exit strategy. CHANGING TAX METHODS The Internal Revenue Code allows taxpayers who carry out work on long-term contracts several tax methods to enhance their tax situation. The optimal method depends on the size of the contractor and the type of construction being performed. In general, long-term contracts must be recognized for using the “percentage of completion” method. Nevertheless, there are nuances within the code. Smaller contractors, such as those with average gross receipts from the previous three years of less than $26 million, have additional options; so do service providers engaged in residential and home construction. Contractors should review any variations in contract volum to determine if a discussion with an advisor about method change is necessary. Depending on the method and sales volume, some changes to an accounting method election are automatic, while others require IRS approval. Contractors can use multiple methods to optimize their tax positions. COMMON TAX CREDITS Maximizing the benefits of tax deferrals and credits can yield substantial savings. Some of the more common credits include: • Employee Retention Credits • Research and Development • Energy Credits and Deductions • Section 179D “Green” Credits for Governmental Structures • Work Opportunity Credits • Certain Investment Credits • Fuel Tax Credits (for Off-highway Business Use) Consider revisiting these credits to ensure you are maximizing any opportunities to utilize them. Tax deferrals can be generated by carefully timing certain transactions, such as accruing or paying expenses prior to year- end or capitalizing certain costs associated with future contract completion. Contractors should be aware of the opportunities that are available.

marcumllp.com | 43