Insider. Construction. MDOT Prequalification Process. Go Green with the Construction Insider. Volume 5 :: Issue 3

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1 Construction Insider Insights & Observations for the Construction Industry Go Green with the Construction Insider In order to be more ecofriendly, we are converting to an electronic newsletter and we need your help! To switch from a printed version to an electronic format, please send an to jgallo@uhy-us.com and insert Green Newsletter in the subject line. Thank You! Volume 5 :: Issue 3 MDOT Prequalification Process In times of reduced overall construction, more companies have found it beneficial to become qualified as a bidder with the Michigan Department of Transportation (MDOT). At a recent presentation for MDOT by the UHY construction group, it was confirmed that over 900 contractors have applied for prequalification, up from 750 the previous year. MDOT prequalification applications are required to be filed within four months of your fiscal year end. For calendar-year entities, this deadline is April 30. Much of the application consists of business-specific information regarding your company experience and expertise in road and highway construction, biographies of key personnel, equipment on hand, etc. The remainder of the application consists of financial information that MDOT uses to calculate your overall financial rating. This rating determines the overall dollar amount for which you are prequalified with MDOT less contracted work already on hand (backlog). Continued on Page 2...

2 The Next Level Of Service UHY LLP MDOT Prequalification Process Continued from Page 1... You are required to obtain a financial statement from an independent CPA firm and attach it to your completed application. The type of financial statement depends on your overall financial rating, which is based on three factors: Net working capital, multiplied by 9 Annual depreciation expense, multiplied by 9 Net book value of equipment, multiplied by 4 There are a number of strategies your company can implement to improve your net working capital rating, most of which involve restructuring the balance sheet. Consult your UHY professional for more detailed strategies that can make your business more appealing in this area. Total financial ratings - the sum of the three factors listed above - of $2 million and above require a CPA audited financial statement, while ratings less than $2 million require a complied or reviewed financial statement or certain MDOT-required verification forms. Contractors with an overall financial rating of $10 million or greater can choose to file an application every other year rather than annually. Submitting a tax return or a tax-basis financial statement instead of a GAAP-based financial statement can actually hurt your financial rating. Key provisions of GAAP accounting include the use of the percentage-of-completion method for recognizing income from contracts (which MDOT requires), and straight-line depreciation of equipment over the equipment s useful life. This is a direct contrast with tax planning, whose objective is to reduce taxable income as much as possible by deferring contract income, where allowed, and taking accelerated depreciation on equipment purchases. GAAP accounting will reflect a much more favorable view of your business and its net working capital than does tax-basis accounting. This is the value of engaging an independent CPA to prepare a GAAP-based financial statement. For more information on this topic please feel free to contact a team leader. Volume 5 :: Issue 3 Construction Insider UHY LLP 2

3 Missing Out on Free Money? HIRE Away! The Hiring Incentives to Restore Employment Act (HIRE) was passed in early 2010 to provide employers with incentives for employers who hire unemployed workers. Previous issues of Construction Insider addressed the HIRE Act and its benefits to employers. However, there appear to be some misconceptions about the HIRE Act, as some employers are uncertain whether or not they qualify. Company personnel, along with trusted business advisors such as attorneys and payroll processing companies, need to have a clear understanding of the act in order to achieve all of the available benefits. Employers should understand the credits and the requirements surrounding them to ensure that they, or their payroll service companies, are taking the credits where allowed, and that the credits are being calculated correctly. Forms 941 that have already been submitted may be amended to take advantage of the incentives. If the credits are being done incorrectly, employers could not only lose out on the FICA credit for 2010, but possibly the credit for retaining the employee in Consult your tax professional for more details regarding this legislation and the opportunities it presents. Act Provisions The HIRE Act includes two different incentives for employers. The first incentive (FICA credit) is an exemption from the employer s portion of social security taxes (6.20% on first $106,800) for qualified new employees. This tax holiday lasts from March 19, 2010, through December 31, The second incentive is the Business Credit for Retention of Certain Newly Hired Individuals. The credit is a general business tax credit of up to $1,000 for each qualified new employee that is retained for one year or more. You may qualify for the first credit, the second credit, or both. The key requirement for both incentives is that the hired individual must have been unemployed or employed for less than 40 hours total during the 60-day period ending on the date the individual begins such employment. The employee must have been hired between February 3, 2010, and January 1, To confirm that an employee meets the requirements, the employer must receive a signed affidavit from the employee. The employer may use the IRS-issued Form W-11 or create its own affidavit. Qualifying employees may include former employees who were laid off and later rehired by the same or related employer, provided they meet the preceding requirement. This is especially applicable to construction companies that may have laid off most of their workforce in November 2010 and then rehired those individuals in March Claiming the Credit The payroll tax exemption is claimed on Form 941, the payroll tax return which employers file quarterly. The retention credit described earlier is claimed on the employer s 2011 income tax return. The amount that may be claimed as a credit is the lesser of $1,000 or 6.2% of the wages paid to the employee during the 52-week employment period. Volume 5 :: Issue 3 Construction Insider UHY LLP 3

4 UHY LLP The Next Level Of Service Information Reporting Requirements Increased Various laws enacted in 2010 have increased the burden on taxpayers to report additional information to the IRS. The IRS expects these new laws will strengthen tax compliance and result in additional revenue. Below is a summary of key provisions concerning information reporting. Corporate Recipients of Form 1099 The tax law has long held that all persons engaged in a trade or business must file with the IRS an information return for payments made to another person aggregating $600 or more in any tax year. Payments that have been subject to reporting include salaries, wages, commissions, fees, interest, rents, royalties, annuities, pensions, etc. Recipients of income that are corporations have typically been exempt from receiving Forms 1099 under this interpretation. New law expands the definition of person to include any corporation that is not exempt from tax. Therefore, a corporation can and should be issued a Form 1099 for payments received totaling $600 or more in a calendar year from a single payee. This new law is effective for payments made after December 31, Rental Real Estate Entities Per the Small Business Jobs Act of 2010, there are additional reporting requirements for rental property expense payments. At present, all payors engaged in a trade or business that make payments to any one payee aggregating $600 or more in any year are required to complete an information return. Reportable payments include compensation for both goods and services and may include gross proceeds from large transactions such as real estate sales. For payments made after December 31, 2010, recipients of rental real estate income are subjected to the same information reporting requirements. In particular, rental real estate income recipients making payments of $600 or more to a service provider in the course of earning rental income are required to file an information return to the IRS and the service provider. Examples of service providers to a rental real estate entity are plumbers, painters, repairmen, attorneys, and accountants. Increased Penalties for Failure to Comply The increase in information reporting requirements is accompanied by increased penalties for noncompliance. Penalties vary based on how late an information return is being filed. These penalties previously ranged from $15 per return (i.e., per Form 1099), all the way up to $100 per return if the IRS deems the taxpayer intentionally disregarded the requirement to file. These same penalties now range from $30 per return up to $250. Small amounts, but they can add up quickly. With these new information reporting requirements and increased penalties for noncompliance, it behooves individuals and corporations to be diligent and organized in this area. That being said, with the new electorate in place, it remains to be seen whether previously enacted laws will be modified. For more information on this topic please feel free to contact a team leader. Volume 5 :: Issue 3 Construction Insider UHY LLP 4

5 The Next Level Of Service UHY LLP Bonding in a Weak Economy Obtaining construction bonds has become more difficult than ever in the past few years. Construction companies should be looking at the items bonding agents will review and take into account in their approval process prior to their need for bonding, or desired increase in bonding. In addition, the company should reaffirm existing surety relationships or start developing relationships for the future. Underwriters look at several items in making a determination on a company s bonding capacity. These items are both financial and nonfinancial. Underwriters look at the character, capacity and capital of the construction company. They may want to review the resume of key employees such as lead estimators. Bonding agents are in tune with the construction world and are often familiar with the reputations of construction companies in the area, and know if they can successfully fulfill a contract or not. Capital is also reviewed in detail, to verify the company has access to the necessary financing to fulfill the job. In addition, having the following items up to date is important, as bonding companies often require them: Annual financial statements (reviewed or audited) prepared by an independent CPA firm Personal financial statements prepared by a CPA Detailed, updated job schedules A strong banking relationship Adequate insurance coverage Information regarding key employees (background, experience, expertise) In the case where the financial statements are not strong for the previous year, but the backlog into the current year is strong or projected to be strong, the company should consider adding backlog information into the annual financial statements. If necessary, invest in preparing interim financials rather than wait for the upcoming fiscal year-end, or prepare pro forma statements showing the improvement that is expected in the months to come. Underwriters pay specific attention to working capital when determining bonding capacity. The stronger your working capital, the easier it is to get bonding. Net working capital is defined as the excess of current assets over current liabilities. The minimum working-capital-to-bonding capacity percentage has decreased over the years. Taking into account the overall wellbeing of the company, there are some strategies that should be considered for improving your net working capital. Restructuring lines of credit as term notes payable to reduce the current portion Capital infusion by owners, if possible Contributing short-term notes payable to owners as additional paid-in capital (equity) Selling off idle or underused equipment to generate cash flow Contractors may also look at ways to stretch their bonding capacity. A contractor may consider getting performance/payment bonds from subcontracts, which minimizes the bonding company s exposure. Before the bid, a joint venture can be set up in which the contractor teams up with another construction company, helping to share the bonding company s exposure. By looking at various company factors that drive bonding capacity, construction companies can make themselves as bondable as possible. It is much harder to enact these types of strategies when bonding is required on short notice. Bondability should be a concern of management throughout the year. For more information on this topic please feel free to contact a team leader. Volume 5 :: Issue 3 Construction Insider UHY LLP 5

6 26200 American Drive, Suite 400 Southfield, MI Construction Industry Insight Our teams of experts are organized across the country by industry, which provides clients the best-in-category knowledge gained from working with similar clients in their industry or service specialty. Our construction expertise includes: In-depth knowledge of the construction industry Knowledge of the surety market Leadership and participation in rule-setting Clients with a wide range of construction activities (general contractors, underground contractors, underwater construction, casino builders, tunnel, bridge and heavy highway); sizes range from start-ups to $1 billion in annual revenue. For more information please contact Tom Callan, our national construction practice leader at or tcallan@uhy-us.com. uhy-us.com Georgia Maryland Michigan Missouri New York Our Locations Atlanta Columbia - B. Jennine Anderson Southfield - Cleat Spacht/Heather Raschke Sterling Heights St. Louis - Patrick Rohrkaste Albany - Marilyn Pendergast New York - Dan Desire Westchester Dallas - Scott Lunsford Houston - Louise Duble Additional UHY Advisors Locations Chicago Oakland New York Houston Washington The statements contained herein are provided for informational purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statues or regulations, and do not resolve any tax issues in your favor. Furthermore, such statements are not presented or intended as, and should not be taken or assumed to constitute legal advice of any nature, for which advice it is recommended that you consult your own legal counselors or professionals. UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of UHY Advisors. UHY Advisors, Inc. and its subsidiary entities offer services from offices across the United States. UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent CPA firm that performs attest services. UHY Advisors, Inc. and UHY LLP are independent U.S. members of Urbach Hacker Young International Limited. Texas Illinois New Jersey New York Texas Washington DC