Fall 2007 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

and Social Security taxes. In deciding whether to use subcontractors instead of employees, the contractor must consider the effect of the decision on the Section 199 deduction. • The Simplified Deduction Method: A taxpayer with average annual gross receipts of $25 million or less, or with total assets at the end of the year of $10 million or less, can apportion all expenses (besides cost of goods sold) to qualifying income based on qualifying gross receipts relative to total gross receipts. • The Small Business Simplified Overall Method: This method generally applies to a small business taxpayer who is permitted to use the cash method of accounting. The method is the same as the Simplified Deduction Method, except the taxpayer can also apportion cost of goods sold based on the ratio of qualifying gross receipts to total gross receipts. Future Changes • Wage Limitation: The deduction is currently limited to 50 percent of the entity’s wages. For tax years beginning after May 17, 2006 (the 2007 year for calendar year taxpayers), only wages related to qualifying production activities will be included as W-2 wages for the 50 percent limitation. • The Simplified Deduction Method, as described above, will be available to taxpayers with less than $100 million in receipts or $10 million in assets at the end of the year. Calculating the Production Activities Deduction for a construction contractor can be a daunting and complex task. The taxpayer may wonder if the tax deduction is worth the trouble and time. However, the taxpayer should remember that time spent now learning the Section 199 system can yield significant benefits when the deduction rate is increased to 9 percent in 2010. RubinBrown has spent significant time researching the Production Activities Deduction and performing the calculation for numerous companies. We can help you overcome the complexities of the deduction, take advantage of any opportunities, and inform you of current and future law changes.

Additional Opportunities for Construction Contractors

• Increased limits for Sec 179 expense: For 2006 taxpayers may elect to deduct as an expense (rather than depreciate) up to $108,000 of the amount of the cost of new or used tangible personal property placed in service during the tax year. Certain phase- outs apply to the expense. • Updated per diem rates: The IRS has updated the simplified “high-low” per diem rates for business travel. The new rates are effective for lodging, meal and incidental expenses (M&IE) paid to reimburse employees for business travel costs on or after Oct. 1, 2006. • High-cost area per diem rate: $246 ($188 for lodging and $58 for M&IE) • All other localities: $148 ($103 for lodging and $45 for M&IE) • Tax credit for contractors who construct energy- efficient new homes: The per-home credit is either $2,000 or $1,000, depending on the type of home and the energy reduction standard it meets. The credit applies to homes with construction substantially completed or homes purchased after Dec. 31, 2005 and before Jan. 1, 2008. • Tax deduction for energy-efficient commercial buildings: The deduction is generally $1.80 per square foot. The buildings must be placed in service in 2006 or 2007 and meet a 50 percent energy reduction standard.

Questions? Contact Frank Hogg, CPA Partner-in-Charge, Contractors Services Group 314-290-3413 frank.hogg@rubinbrown.com

26 u winter 2007 issue