As the construction industry focused heavily on pandemic-related changes over the past two years, other necessary changes were created or delayed. It is important not to overlook the new compliance requirements and existing strategies that can help your construction company maintain its financial health in another year of economic uncertainty. As we work our way through 2022, here are three of the most significant ones to consider.
Get Ready for Your Paycheck Protection Program (PPP) Audit
PPP continues to be one of the most talked about topics arising out of the pandemic. Like others, the construction industry greatly benefited from the PPP. Now that most contractors have received their round 1 and round 2 forgiveness, now is the time to be prepared for the PPP audit, as the audits have already started, and more are coming. Construction contractors expecting an audit should compile and centralize the information to support their case for necessity, usage and forgiveness of the PPP funds.
Clearly, your payroll records, union reports and backup of other qualified spend items need to be available. Also understand how your loan base was calculated and what you considered within that math. At the early audit stages, the SBA is questioning the validity of loan bases.
While there is a strong financial condition component to these audits, the key item is the uncertainty at the time, which needs to be emphasized. Look to documentation of real-time conditions from the onset of the pandemic, including project shutdown notifications, board minutes/internal memos discussing decisions to lay off employees, and any other impactful documents.
Get ASC 842 Compliance Right
The construction contractor’s financial statement is about to undergo another change.
Much like the changes to their Generally Accepted Accounting Principles (GAAP) revenue recognition model, contractors will now have to adopt changes to reporting leasing arrangements (as the lessee). In short, all long-term leases that have been previously expensed will now be pulled up on the contractor’s balance sheet as a right-of-use asset with an offsetting current and long-term liability. The challenge will not be in identifying and accounting for the leases, but rather in how bringing on debt impacts the contractor’s working capital, debt-to-equity covenants, maintenance of other financial covenants, project prequalification, etc.
The new standard is effective for private companies in fiscal years beginning after Dec. 15, 2021, and interim periods beginning after Dec. 15, 2022. This will require organizations that report on a calendar year to implement the standard for their Dec. 31, 2022, financial statements.
Re-evaluate Your Income Tax Strategies
While tax planning is often thought of as a year-end activity, it should be kept in mind throughout the year. Important tax deferral strategies can be employed for 2022 with the proper review and planning.
The types of contracts your construction company performs under will determine which accepted income tax deferral strategies you can employ. For example, while a construction company’s overall method may be accrual, to the extent any projects are completed within a single tax year, that project could qualify for cash basis.
Also, current income tax rates will sunset by the close of 2025, if they are not ended prematurely. Based on most recent political vibes, the ending of the current rate structure will likely result in higher tax rates for all.
These are powerful strategies that should be considered, especially since cash flow is vital to a contractor’s success. In a year of inflationary pressure, rising costs and ongoing pandemic-related expenses, do not risk the loss of critical PPP funds or non-compliance with ASC 842. Also, don't neglect valuable tax deferral strategies.
Ronald J. Eagar, CPA, CCIFP is a construction partner and chief operating officer at Grassi. With more than three decades of experience in accounting, he advises the construction industry. Reach him at firstname.lastname@example.org.