A decade ago, Mississippi’s construction industry was enjoying arguably its most profitable period in history — a golden age. Building was booming, and most firms had as much as they could handle.
However, the last 10 years have been perhaps the worst of times for the state’s contractors. They are now scrambling — and paying much closer attention to their bottom line.
“It has been a significant adjustment for everybody,” said C.J. “Buddy” Edens Jr., president and CEO of the Mississippi chapter of the Associated Builders and Contractors (ABC). “Nobody anticipated this kind of crash. In my 37 years in the industry, it’s the worst I have seen.”
“We have gone from the highest peak to the lowest valley,” said Perry Nations, who has been in the construction industry for 35 years and heads the Mississippi chapter of the Associated General Contractors (AGC). “I think the last few years have shocked many firms’ systems, especially those that came on line during the recent ‘golden age’ and have never experienced any downturn, much less something like we’re seeing today.”
Cash flow is the biggest financial management challenge contractors face even when times are good. If not properly managed, the lag time between working a project and getting paid while incurring costs for labor, materials, etc., can be a business-killer.
Now in a crunch, firms are looking for every opportunity to enhance cash flow. But many firms do not have an accounting department or outside professional expertise to take advantage of tax breaks, bonus depreciation and other strategies that can boost the bottom line and put cash in contractors’ pockets. Struggling to meet basic operational costs, many firms, particularly smaller ones, do not have the money to retain professional assistance.
Trade associations such as the ABC and AGC offer free accounting advice to their members in an effort to help. Both Edens and Nations report they are fielding more calls from member firms with cash flow and accounting questions.
Bryan Cherry, CPA, CITP, tax senior manager in the Ridgeland office of HORNE LLP, often speaks to construction groups and also publishes a new tax legislation newsletter. A 12-year veteran of construction accounting who serves as a technical tax resource for HORNE, Cherry said he is seeing too many firms that are not aware of strategies available to survive the downtime.
“Too many firms are ill-equipped to deal with these lean times,” Cherry said. He added that the situation is exacerbated because many firms, desperate to stay a going concern, are “venturing outside their niche,” taking work with which they are unfamiliar.
They are often also unfamiliar with strategies for enhancing cash flow. Cherry pointed to the off-road fuel excise tax break as example.
The federal tax law offers a 24¢ tax credit for every gallon of un-dyed diesel fuel used in construction equipment such as bulldozers and excavators, and an 18¢ tax credit per gallon of gasoline. It can put serious cash back in contractors’ pockets.
Here again, though, firms that have access to accounting expertise have an advantage. Firms can take this tax credit quarterly by filing out Form 8849. Form 4136 allows firms to take the tax credit, too, but for the year, forcing firms to wait months to see the credit.
Another cash flow-enhancement strategy is bonus depreciation. Last fall, legislation was extended that provides for a 50 percent bonus depreciation on equipment purchased since 2008 and 100 percent for equipment purchased from Sept. 9, 2010 through all of 2011.
Firms can use this bonus depreciation to create a tax loss this year that they can carry back to 2009 and/or 2010. If a firm had taxable income in either or both of those years, they can carry back the 2011 tax loss and recoup the taxes paid in 2009 and/or 2010.
“For firms looking to upgrade equipment or buy computers or furnishings, 2011 would be the ideal time,” Cherry said.
Nations said, “I cannot imagine firms surviving without professional legal as well as financial assistance.”
However, Nations added that firms also need to work harder on watching billing cycles and aggressive collecting accounts receivable.
“Firms cannot let past relationships get in the way of business decisions,” he said. “They have to press for payment.”
Cherry said firms must look at every cost. As example, he said many firms, especially during heady times, simply pay their insurance premiums and never check to see if they need the coverage.
“They simply must evaluate every cost – and squeeze every benefit,” Cherry said.
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