2. Bank Perspectives on Construction
Lending in a Tough Credit Environment
Moderator - Robert W. McLeod
University of Alabama, Professor of Finance and the John Bickley
Faculty Fellow in Finance and Insurance at the University of Alabama.
Chairman of Financial Economics Consulting Group, Inc.
Panelists
• Bank of Tuscaloosa, VP Walker Evans
• Bryant Bank, SVP Kevin McMahon
• First National Bank of Central Alabama, EVP Jim Clayton
• Regions Bank, SVP Charlie Dunn
• Renasant Bank, City President Kyle Faught
3. Punch List for a Healthy
Financial Statement
Bryan R. Chandler
Managing Shareholder
4. Three C’s of Contract Surety Underwriting
1. Character
a) Management team
b) Integrity
c) Reputation
d) Honesty
e) Trust
5. Three C’s of Contract Surety
Underwriting (Continued)
2. Capital
a) Profitability
b) Working Capital
c) Net Worth
d) Line of Credit
e) “Off balance sheet” value
6. Three C’s of Contract Surety
Underwriting (Continued)
3. Capacity
a) Ability to do the work
b) Contract terms
c) Operations
d) Experience
e) Type of work
7. Causes of Contractor Failures
• Substantial and sudden increase in job size
• Expansion into new geographic areas, new types of
construction and business
• Changes in key personnel
• Lack of managerial skills
• Under capitalized
• Inadequate working capital and credit lines
8. Causes of Contractor Failures
(Continued)
• Accounting systems not equipped to track
construction costs on a job-by-job basis
• Failure to properly estimate job
profitability and cost to complete
• Poor billing and collection procedures
• Co-mingling of personal and business
• Contractual obligations misunderstood
• Inability to produce accurate internal financial
statements
9. Punch Items for a Healthy Financial
Statement
• Don’t focus solely on the income statement.
• Bankers and sureties use the entire financial statement,
including footnotes and supplemental disclosures and
schedules.
• The balance sheet is a “point in time” financial snapshot
of the assets, liabilities and net worth of the company.
• The other elements of the financial statements also paint
a “picture” of your company’s operations.
• It is important to run your company so you make a good
“picture”.
15. Contractor Warning Signs
Equity Ratios
• Debt to equity > 3 to 1
• Working capital to equity < 1.3 to 1
• Interest bearing debt to equity > 80%
• Overhead to equity > 1 to 1
Billings Ratios
• Underbillings to equity > 20%
• Cash to overbillings < 1 to 1
“Underbillings are unusual and overbillings
should be in the bank.”
16. Contractor Warning Signs (Continued)
Liquidity/Working Capital Ratios
• Average age of receivables > 60 days
• Average age of payables > 45 days
• Revenue to working capital > 20 to 1
• Revenue increasing > 50% in one year
Operating Ratios
• Job profit fade > 10%
• Overhead increasing > 50% in one year
Other Red Flags
• Related party receivables
• Shareholder loans
17. Contractor Warning Signs (Continued)
• Development activities
• Investment in non construction activities
• Increasing or constant bank borrowing
• Purchase of substantial amount of fixed
assets in one year
• Operating losses for two consecutive years
• Substantial decrease in backlog
• Non-existent or incomplete contract
disclosure in financial statements
20. Tax Tips for Your Tool Box
Kim Smith
Katy Beth Jackson
21. Tax Tips
• Construction industry methods of accounting
• Maximizing depreciation deductions
• Domestic production activities deduction
• Maximizing tax deductions for entertainment
facilities and per diem
22. Tax Traps
• Pitfalls of construction industry methods of
accounting
• Limits on accelerated depreciation
• Limits on the domestic production
activities deduction
• Pitfalls of entertainment facilities and per diem
23. Tax Tips: Construction industry
methods of accounting
• Methods of accounting for construction
contractors
- Cash
- Accrual
- Accrual excluding retentions
• Tax definition of a long-term contract
- Completed contract method
- Percentage of completion method
• De minimis exception for percentage of
completion method
24. Tax Tips: Construction industry methods
of accounting
• What is the tax definition of a long-term
contract?
• Examples of long-term contracts
• This tax definition may differ from the one
used in your financial statement reporting
25. Tax Tips: Construction industry
methods of accounting
• Completed contract method of accounting for
long-term contracts
• May be used by any contractor whose 3-year average
annual gross receipts are $10 million or less on jobs
expected to be completed within two years
• Timing of recognition of contract income and contract
expenses on your tax return
• Remember to allocate some of your indirect general &
administrative expenses to job costs
• Benefits of using this method
• Generally, results in maximum deferral of taxable
income
• Simpler
26. Tax Traps: Pitfalls of
construction industry methods
of accounting
• Completed Contract
- Losses on underperforming jobs aren't
recognizable until the contract is complete
- Bunching of income may occur if several
contracts become complete in the
same year
- AMT adjustment for Long Term Contracts
• Percentage of Completion
- Potential loss of deferral
27. Tax Tips: Maximizing depreciation
deductions
• Section 179 Expense (chart on next slide)
- Applies to new or used property
- 2011 allowable expense $500,000
• Bonus Depreciation
- Only applies to NEW property
- No limit on bonus - 100% for purchases in 2011
28. Tax Tips: Maximizing depreciation
deductions
Section 179 limits
Maximum Sec. 179 Maximum Investment
Expense Allowed in Sec. 179 Property *
2011 $500,000 $2,000,000
2012 125,000 500,000
2013 and thereafter 25,000 200,000
*The dollar-for-dollar phase out begins at this level
29. Tax Traps: Limits on accelerated
depreciation
• Section 179
- Taxable income limitation
• Bonus depreciation
- No used property
- No real property other than qualified leasehold
improvements
• Basis issues for pass-through entities
• Financing purchase of assets vs. accelerated
depreciation
30. Tax Traps: Limits on
accelerated depreciation
• Basis issues for pass-through entities:
- Applies to pass-through entities
(S corporation, partnership/LLC)
- Basis can be complicated and can be
affected by many different things
- The basics:
• Income and money contributed to the business by
an owner increase basis
• Expenses and money taken out of the business by
an owner decrease basis
31. Tax Traps: Limits on
accelerated depreciation
• Basis issues for pass-through entities
- An owner generally must have positive basis
to get the full benefit of most tax deductions
• Disallowed losses or deductions carry over
indefinitely
• In an S corporation, Sec. 179 can be
especially tricky
- It is a deduction which is commonly hung up in
basis limitations because owners may only deduct it
on their personal return if they have positive basis
after considering income earned and distributions
taken out of the business
32. Tax Traps: Limits on
accelerated depreciation
• Financing new assets – should I use accelerated
depreciation?
- If you choose to finance the purchase of a
major asset, weigh the options:
• Downside of depreciating the entire cost
of the asset in year purchased
• Consider how long you plan to own the
asset
• Watch out for recapture if you sell
• Remember to check taxable income and
consider it when deciding
33. Tax Tips: Domestic production activities
deduction
• Deduction equal to 9% of qualified
domestic production activities income
for 2011
• Paper deduction that requires no cash outlay
• For pass-through entities, the deduction does
not reduce an owner’s basis in any way, so it
does not cause limitations on the use of other
tax benefits
• General contractors and subcontractors may
qualify
34. Tax Tips: Domestic production activities
deduction
• Qualified domestic production activities income
- Net income from manufacturing and production
activities conducted in the U.S., including real
property construction activities and from
engineering and architectural services
performed in connection with such
construction
- The project must involve the initial construction
or substantial renovation of real property,
including, but not limited to:
• Buildings and their structural components,
permanent land improvements, oil and gas wells,
and infrastructure
35. Tax Traps: Limits on domestic
production activities
deduction
• IRS has moved DPAD to its Tier I list.
• February 24, 2011 Tax Case “Gibson”
- repair vs. substantial renovation
• Two limitations - W-2 Wages and
Income Limitation
36. Tax Tips: Maximizing tax deductions for
entertainment facilities and per diem
• Good recordkeeping is a must for tax savings
in these areas:
- Entertainment
- Shareholder personal use of auto
- Per diem
• What should the records show?
- How much was paid and when/where was it
paid
- Business purpose
- Business relationship among people involved
• Potentially large tax savings are available if
you handle the recordkeeping correctly
37. Tax Traps: Pitfalls of
entertainment facilities and
per diem
• Entertainment Facilities and Personal Use
of Auto
– Entertainment Facilities
• Includes hunting camps, boats, condominiums
– No deduction allowed
– Includes Depreciation and operating costs,
maintenance costs, and losses on disposition.
• Club Dues
– Nondeductible if for business, pleasure, recreation or
other social purpose
– Deductible if for professional organization, civic or
public service organizations as long as primary
purpose is not entertainment.
• May include club dues as taxable wages subject to
employment taxes to receive deduction.
38. Tax Traps: Pitfalls of
entertainment facilities and
per diem
• Entertainment Facilities and Personal Use of
Auto
– Personal Use of Auto
• Limitation on depreciation unless employee pays for
personal use or the company reports the personal use on
the employee's W-2
• May use Annual Lease Value Table to compute personal use
• Per Diem
– Paid by contractor for lodging, meals and incidental
expenses
– To be fully deductible, must be paid at or below the
federal per diem rate for the location
– May not pay per diems in excess of allowable federal
rate without including in the employee's W-2
42. Construction Practice Group
Shareholders
Bryan
Chandler
CPA, CFP, PFS
Managing Tracie Kim Karen
Shareholder Manderson Smith Tenbarge
CPA CPA CPA
Manager Manager Supervisor
Scott
Goldsmith
CPA
Katy Beth Jessica Kris
Jackson Morris Walters
Leighanne CPA CPA Senior
Faught Senior Senior
CPA
Support: Bobby Bragg, CPA | Practice Growth, Amy Echols|
Marketing Director & Kelly Jones, CPA | Firm Administrator
43. Other JMF Services
Pension Administration, Audits & Consulting
Specializing in Network Systems of two to 200 Computers.
Client Service Department
Payroll Tax Compliance, Outsourced CFO and
Bookkeeping, Quickbooks ProAdvisor Consulting and
Accounting Systems Consulting.
Estate & Trust
Set-up & Consulting, Succession Planning and Tax Preparation
Sales/Use Tax Review
44. Additional JMF Resources
The nation’s premier provider of specialty tax services including help
for businesses competing for government-sponsored tax credits and
incentives.
The nation’s oldest and largest firm dedicated to cost segregation
studies.
R&D Studies| Section 179d Energy Studies | Cost Segregation Studies
