It is the perfect “Catch-22:” Thanks to the economy and skyrocketing costs, rural building contractors and businesses are making less money, paying less in taxes while costs for everyone are going up – including those of government at the state and local levels.
Attempting to prevent local, state or federal lawmakers from increasing the amount of red-tape, rules, regulations, fees, and taxes that every contractor and builder must contend with is often fruitless – and always expensive. Battling city hall, the county or statehouse over zoning issues, unfairly levied fines, property tax assessments and, yes, tax bills, can be even more expensive. Fortunately, our tax laws contain a number of unique tax breaks and more routine deductions to help every builder and contractor reduce the cost of those battles.
No longer is there a tax deduction for attempts to inform, educate or influence lawmakers. That’s right, lobbying expenses directed toward influencing federal or state legislation are not usually tax deductible.
No longer is the cost of lobbying to promote or defeat legislation or to influence the public about the desirability or undesirability of proposed legislation deductible as a business expense – even though the legislation may affect the building business. Fortunately, this prohibition does not apply to in-house expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation are, of course, deductible.
WRITE-OFFS FOR LICENSES AND OTHER INTANGIBLES
When it comes to those irksome licenses, permits and other business necessities, many fall within the category of “intangible assets.” Because neither a value, nor a predicted “life” can be placed on most intangible assets, they are rarely tax deductible. Fortunately, Section 197, a unique write-off for “intangible” assets “acquired” by a building business, allows the cost of those assets to be deducted or amortized over a 15-year period.
Among the Section 197 assets are licenses, permits, or other rights granted by a governmental unit or agency. Also included are patents, copyrights, formulas, designs or similar items acquired by a building business.
Legal expenses are generally immediately tax deductible, even if primarily for the purpose of preserving existing business reputation and goodwill. However, while the deductibility tests are substantially the same as those for other business expenses, they clearly preclude a current deduction for any legal expense incurred in the acquisition of capital assets – including legal fees incurred in conjunction with zoning changes, leases and other intangible assets.
FIGHTING PROPERTY TAXES
Despite all of the attention focused on income taxes, it is the bill for the tax on the property owned – or leased by – many building businesses that is the biggest expense and the most difficult to manage. According to the Council on State Taxation, a Washington, DC think-tank, American businesses shell out more on property taxes than for any other type of state or local taxes.
Battling city hall or, in this case, the property tax assessor, offers the potential for major savings. Even better, once reduced, the savings generally last year-after-year.
Many building businesses and contractors may own little or no property. However, just because the business rents its offices, storage or shop space doesn’t mean that property taxes should be ignored. In the Northeast, for example, studies show that property taxes range from 15 to 25 percent of the total rent paid by most businesses.
All property taxes are “Ad Valorem” taxes, that is are based on the value of the property. Since so many variables enter into the equation, it is rare that the assessor and the property’s owner will agree on a value. Thus, armed with a few facts about the property, it is relatively easy to review and question the tax assessor’s record for the property.
DON’T SELL SALES TAXES SHORT
Many businesses are familiar with their role as “collector,” of sales taxes. While most businesses are diligent in collecting and remitting taxes on the goods and services they sell, many overlook the fact that items purchased for resale are exempt from sales taxes.
Non-merchants are even less aware when it comes to items they purchase. The purchase of equipment, fixtures or other capital items out-of-state often means a “use” tax must be paid. Needless to point out, the states are cracking down on everyone who buys out-of-state to avoid local sales taxes.
ACROSS THE LINE
Every builder and contractor faces an interesting challenge: what happens if you do business in more than one state? The state that the building operation calls home generally wants to tax every dollar of income. Every other state where you do business wants to tax income earned in their state. Does that mean paying taxes on the same income twice?
Fortunately, only rarely does anyone wind up paying tax on the same income twice. “Rarely” is the operational word because the way states handle the problem is not uniform.
In other words, if 45 percent of your business is in state A and 55 percent in your home state of B, that doesn’t mean 45 percent of your building operation’s income will be taxed in A and 55 percent in B. Depending on the rules in each state, the builder or contractor may wind up paying slightly more or less. In fact, depending on the rules in each state the building operation could wind up paying state tax on less than 100 percent of its income.
With states looking for new revenue without having to raise taxes, they are increasingly – and more aggressively – asserting “nexus”: the minimum amount of contact between a taxpayer and a state that permits taxation by the state. Those contractors and building business owners/managers may find it pays to fight the nexus label.
A recent survey by BNA, an independent publisher of information and analysis products for professionals, found 30 states impose tax for an entire year on any business with income tax nexus. In fact, all but five states maintain that an employee who telecommutes from a home located within their borders is sufficient to create income tax nexus for an out-of-state employer. In several instances, the courts have backed states assessing taxes on out-of-state businesses based on the nexus created by an outside sales person’s visits.
The increasing financial burden for every builder, contractor and business trying to comply with the growing number of new rules and regulations and the ever more expensive fines, penalties and, yes, even new or higher taxes, is significant. While few government programs on any level, local, state or federal, come with provisions to help offset their cost, our tax laws remain as one avenue of potential savings – at least for those building business owners/managers who seek professional help when battling city hall. RB
Mark Battersby is an expert in tax and financial matters. With more than 30 years experience in small business issues, he lectures and writes extensively on business topics. Contact him at MEBatt12@Earthlink.net.