Year-End Planning for Contractors

How’s your year-end planning going? If you haven’t put some time aside to look at where your business will be at the end of 2021 and make a plan for 2022, this episode is your chance to do some crucial reporting and decision-making that will set you up for success over the next year.

Topics we cover in this episode include: 

• The four prongs of year-end planning for contractors
• The tax considerations you should discuss with your CPA during year-end planning and how your planning should go beyond minimizing your tax payment
• The importance of good year-end financials for getting bonds
• Why you should build a cash flow plan and how a construction-oriented CPA can help you get there

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TRANSCRIPT

[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today, we are talking about year-end planning. I can’t believe it’s already getting close to the end of the year. Now you might be listening to this later on, but for us, this is October. Year-end planning is coming up here and we are, by the way, the Contractor Success Forum, discussing financial strategies for running a more profitable, successful construction business.

And if you want to know more about us, go to our show notes. And if you want to tell everybody else how great this show is, help us out, go to the…what is it? Rate it. That’s right. So you rate it. You got to scroll all the way down below, below all the episodes, if you’re on iTunes, and rate us, give us five stars. That will let us go closer to the top of the list, so more people can hear the show. But maybe you don’t want your competitors to have this precious information. So you may not want to rate us. But they do want to rate us! To help us out. Thanks. 

And we have our three long-term construction industry professionals. We have Wade Carpenter with Carpenter and Company, CPAs helping contractors nationwide to become permanently profitable. And he has over 30 years of experience. And Stephen Brown, our construction bond agents with McDaniel-Whitley bonding and Insurance agency. And he also has over 30 years of experience, underwriting and placing bonds for you as contractors. And I am Rob Williams, your profit strategist with IronGate Entrepreneurial Systems providing insightful clarity to your business, having decades of experience in vertical integration as a contractor, a manufacturer aviator, and a financial strategist in the country. 

[00:02:04] Stephen Brown: Clarity. 

[00:02:05] Rob Williams: Insightful clarity. That’s what we are providing all these people. Dang.

That sounds amazing. 

[00:02:11] Stephen Brown: That’s insightful. 

[00:02:13] Rob Williams: Thank you. Yes, It is. And it’s clear. It’s clear. 

[00:02:16] Stephen Brown: It is. 

[00:02:18] Rob Williams: All right. 

[00:02:18] Stephen Brown: Remember our motto, guys. You don’t know what you don’t know. You don’t know what you don’t know until you know it. You don’t know what you don’t know. And I tell you what a lot of my customers don’t know about. It’s getting ready for the end of the year. They maybe pretend like, well, maybe I don’t need to do this. I’ve got other things. It’s football season. I don’t need to be messing with this kind of stuff. Wade, but what do you say?

[00:02:47] Wade Carpenter: Well, I, I guess I can talk about the, the expectations of the CPA. Most of the time if a CPA does any planning at all for a contractor it’s around the tax side, but I, I believe there’s really, there’s four prongs of the tax planning. 

For our general contractors that really need this, you want to minimize your taxes while maximizing your financial statements, all while not wrecking your cashflow. So it kind of, it needs to take three prongs to it. But for my CFO clients, the ones that, we work deeply with, we also put the fourth prong on there, which a lot of people should really be thinking about.

And that’s the strategic planning. Looking forward and looking at what you’ve been doing, and maybe you should be doing some things differently. 

[00:03:34] Rob Williams: That I love that three prong– can you say there’s three prongs again?

[00:03:39] Wade Carpenter: Minimize– I’ve said this for years, that most, most contractors or most CPAs don’t do this for contractors. You want to minimize your taxes while maximizing your financial statements while not wrecking your cash flow in the process. And I can explain a little bit 

[00:03:54] Rob Williams: Wow. That is a, that’s a, that’s a great, that is a great summary. I like that. And then the fourth one is strategic 

[00:04:01] Wade Carpenter: Strategic planning side of it and so, 

[00:04:04] Rob Williams: That’s a great, that’s a great advice. Great advice. I like it. Anyway, go ahead. Sorry. That was, that was great. I really liked hearing that. 

[00:04:11] Wade Carpenter: So we want to start by being on the tax side. Just talk about– 

[00:04:14] Rob Williams: you are the tax– 

[00:04:15] Wade Carpenter: We could do a whole podcast on the tax side, but you know, a lot of our listeners, there are different situations. Some of them have long-term contracts, but one of the things I would tell you, the first thing you should know is your accounting method for tax purposes. If you know what it is, you can know how to, I don’t want to say manipulate it, but work with that strategy to minimize your taxes. A lot of times you may be on a cash basis and there are certain things you would do to minimize your taxes. Basically, it’s deferral games and we’re trying to play legal deferral games on our taxes. And that’s what most of the tax planning is. 

If we’re talking about like, let’s get way into the gray and let’s do something illegal, well, I really wouldn’t recommend that. 

But the other thing, the next point that, I just did a webinar yesterday for about twenty-five people. Sometimes there’s new tax laws that you should be aware of that and how they can affect you. For the last five years when the, 2016, the tax cuts and jobs act, and then, some of the other ones are, there’s been some major things every year, PPP loans and how those are going to affect us. 

And then here in Georgia, I know this doesn’t affect Tennessee becuase you guys don’t have state income tax, but the webinar yesterday is the SALT Parity Act of 2021. Georgia implemented that and very few CPAs in Georgia know about it. And I’m telling people, you need to really understand how that affects you and plan for it now, because it could affect how much you pay and how much you save in this case and on the federal side as well as potentially avoiding some tax penalties. 

[00:05:58] Rob Williams: Can you tell us sort of what the SALT Parity Act is? 

[00:06:01] Wade Carpenter: Well, I did an hour on this yesterday, so it’s like, yeah. You know. But basically the tax cuts and jobs act limited how much you could deduct on state and local taxes, if you itemized. And they significantly increased the standard deduction. So a lot of people can’t itemize.

Well, a lot of people are trying to get around it and what this law does is, in Georgia, which there are several states passing this, but, for partnerships and S corporations, we can deduct the state tax at the entity level, then deduct the taxes on the federal K one and it, ends up saving money, especially like partnerships you can save on self-employment tax.

It can be, significant if you plan for it right. I don’t have time to go deep into that, but you know, legal ways of deferring taxes, if you know the game and, done properly, that can also– most people think, well, if I do something, spend a bunch of money out– I rail all the time about like, we go buy a truck on December 29th to knock down our taxes. There are things you can do if your tax method is on cash basis. But your financial statement, you’ve got long-term contracts, you’re doing a percentage of completion, which leads into the financial statement side. I mean, I know Stephen, I know you were talking about some of the stuff on the financial statement side.

[00:07:30] Stephen Brown: Right. A construction-oriented CPA understands the needs of the bonding company while minimizing your taxes. You can’t have two sets of books for that. It doesn’t work. And I always have said and maintain that I’ve seen a lot of good contractors go bankrupt trying to get out of paying taxes.

So you just kind of plan ahead. And another tip, I’d say Wade is, if you don’t understand what your accountant is telling you, take the time to try to figure it out. You don’t have to be an expert, but ask questions. I know that that account might be on the meter and the meter is running, but you got to learn those implications. And your accountant, if he’s a good one will– or she’s a good one, will appreciate you asking those questions 

[00:08:16] Wade Carpenter: Right. 

[00:08:18] Rob Williams: Yeah, Wade. I thought it was so interesting. I know Stephen and I were in a CFMA class and looking at the GAP reporting for your financial statements and then the taxation. And, and I don’t think I ever realized that they’re really two separate things. I mean, they’re, they’re sort of, they’re connected obviously, but. 

[00:08:37] Wade Carpenter: Well, I know Stephen said they’re not two set up separate sets of books and technically 

[00:08:41] Rob Williams: are, 

[00:08:42] Wade Carpenter: worded, but in a way, yes, there are two legally separate sets of.

[00:08:48] Stephen Brown: Yeah.

Well, as far as what you show the bond underwriter, I’m 

[00:08:52] Rob Williams: Maybe they’re not different sets of, but maybe, but there are two ways of reporting. There’s the reporting for taxes and then

[00:08:57] Stephen Brown: That’s more accurate.

[00:08:59] Rob Williams: That are books for, for gap and for what Stephen sees and these underwriters and

[00:09:04] Wade Carpenter: Yeah,

[00:09:04] Rob Williams: And that was fascinating to me. 

[00:09:05] Wade Carpenter: But you know, some of the things that you do, like holding off or billing or collecting money or those kinds of things, which I’ll get into, but, knowing how to working with number one, working with somebody like Stephen, a construction oriented insurance agent can tell you, what are we looking for?

Do we want to see so much in cash? Do we, we want to see our working capital ratio or equity of certain amount? And we can plan for that. And as far as, trying to do that, knowing how, if you do something on the tax side, how is that going to affect your, say, just your working capital ratio? Knowing what a bonding company would throw out of your working capital, like prepaids and I mean, no most contractors don’t have inventory or loans to shareholders, those kinds of things.

But, if you pay down your payables, As long as you’ve got positive working capital that helps your working capital ratio. But if you’ve got a negative working capital, you’re working against yourself and knowing those rules can definitely help dress up the financial statement if you know how to do it.

And again, talk to your bond agent from, from my perspective and Stephen correct me if I’m wrong, but by this bond agents, hang their hat on those year-end financials.

[00:10:26] Stephen Brown: Absolutely. That’s the number one thing that greases the wheels toward getting your bonds. They look at that year end statement and everything is based on that. Everything. Now as the year goes on, your ability to provide interim financial statements, a good balance sheet income statement, a work in process schedule, that helps you. 

But it’s your year end Wade. You’re right. And that’s why we’re out there pounding the pavement begging our contractors, please meet with your CPA now. If you’re a year-end is 12/31, please meet with them now. Middle of October, November. That’s the time to start strategizing that’s that’s what we need to get through to everybody. There’s only so much Wade can do after your year end when he’s reporting.

[00:11:12] Rob Williams: These things like, like, what if I want to go get that f-150 I gotta get it on 1231 and spend all my cash after that. Because I mean, it’s still an asset. it 

goes 

[00:11:20] Stephen Brown: It sounds.

[00:11:21] Rob Williams: into my asset of a truck and then a great idea. And then I get to reduce my taxes. 

Buy plane Yeah. that a good idea? 

[00:11:31] Wade Carpenter: No, I mean, that’s absolutely another point on the tax side. After December 31, assuming you’re a straight, December 31 year end, on January one, it’s too late to do something about 99% of what you can do to minimize your taxes. So, just keep that in mind.

If you’re trying to dress up your financial statements, it takes a couple of months because we’re going to have to kind of project where you are with your contracts. Which kind of leads into the third prong of this… 

[00:12:00] Rob Williams: Wait, before we, before we go to that, by the way I don’t, in case you guys weren’t clear when the car dealerships have the best day of the year to buy a truck is December 30th. That’s not, we, we’re not being really serious about that. We were actually being sarcastic. Don’t go do that. Isn’t that kind of right? Just, I wanted to make sure our listeners 

[00:12:20] Wade Carpenter: Well, people do that all the time. People hate paying taxes to begin with. Contractors absolutely hate, absolutely hate paying the government anything. That’s always their, what can we do to get out of paying anything? But the idea is let’s not have surprises. Let’s plan. We say on this thing all the time, if you never have profit, then you know, you’ve never building a healthy company. 

[00:12:45] Rob Williams: But, but if bonding is important to your business, maybe it’s not important to your business. But bonding and getting a bigger bond is important, or are having a good financial statement to sell your company or different things like that, that’s usually not a good idea. I was just to make sure they weren’t thinking we were recommending go buy a truck at the end. 

[00:13:04] Wade Carpenter: Well, it’s, it’s a part of the strategy and sometimes we’ll, we’ll tell people that’s if they need it,

[00:13:11] Stephen Brown: now’s a good time.

[00:13:12] Wade Carpenter: But you know that also on the financial end, on that brings up another huge point. Somebody like Stephen, the bonding agent is going to look at your financial statements very differently from a banker.

So if you’re trying to dress up your, I mean, I wouldn’t say very different. But the bond agents are savvy to this stuff. What does it do to your working capital, your equity? You may need to dress up your debt to equity ratio. A lot of the stuff on the balance sheet that most people don’t know how to do.

Yes. They want to see profit. They want to see cash flow. But they want to see a healthy balance sheet. But you know, the things that a bond agent would throw out, is not the same thing as a banker. And a lot of times the bankers are not really as sophisticated as somebody like Stephen. 

[00:13:58] Rob Williams: Thank you very much, Wade. All right. Where, where I didn’t mean to– 

[00:14:01] Wade Carpenter: That’s okay. That also leads into the third prong of this is if we do have one plan to minimize our taxes, and then we’re also maximizing our financial statement, well, if we don’t pay attention to saying, if you hold off on your billing, you may be into February, March, before you get some cashflow in, on that job. Don’t wreck your cashflow or at least think about it and think about what it’s going to do as part of the plan. You also need to know if you’re going to have to have a huge distribution of cash to cover your taxes in March or April when that comes in. 

So cashflow side is not just part of the plan. It’s gotta be part of the plan, but it also is a strategic part of it. I’ll always say a Contractor should have two different types of plans. Especially year end, this is the time to be thinking about it. The first type of cashflow plan should be the short term, usually a 13 week, one quarter ahead or six months ahead. The shorter term, because that is going to be how you can see what’s coming. The longer we get out on trying to plan for cashflow, the less accurate it’s definitely going to be. But if you’ve got long-term contracts, so it’s going to last, you can guess at what’s going to be billed over certain months, but you know, you need a short-term plan to say, what do we need to cover in the next three months? And you also need to look at it on a long-term basis. This is the time of year to do, at least a year in advance, but typically we’ll do like five years and it’s not just, from that standpoint. It’s also saying, well, if we’re gonna get out of debt or if we’re gonna do one thing or another, we need a longer-term plan. And the longer term plan of cashflow gives us targets to shoot for. That is our benchmark. Things always happen to where, supplies, prices of supplies, labor goes down, those kinds of things that can affect it, but that long-term cashflow plan can give you a major point of like, this is what we’re aiming for. And that’s something you should be thinking about if you’re not getting results you want.

[00:16:19] Stephen Brown: Right this whole, this whole year-end tax planning as about hitting your target. How you measure that is what your accountant helps you do. And again, if you’re not meeting with your accountant before the year end and you’re bonding company’s getting the year-end financial statement in April, May, June, it’s almost guaranteed if the statement comes rolling in around August or September from the previous year, it’s going to show a loss.

That’s what all bond underwriters think. 

[00:16:49] Rob Williams: Yeah. In that cash flow planning, Wade, I have people call me, new clients a lot and I can’t believe– I can believe it, but I’m still surprised at how many people don’t realize. They’re growing and they don’t know why they don’t have money. And then there’s like, oh, but we’re going to be okay because we got 2 million more dollars of business. And I see they’re like getting paid in 90 days and they’re paying in 10 days. And I’m saying, you know, that’s going to cost you hundreds of thousands of dollars of cashflow and they haven’t planned for any of this and they don’t have a clue.

And I’m just thinking, okay, these guys, they’re going to be out of business in a year. This is going to take them under, if they don’t have some kind of financing plan or something for that. So. 

[00:17:34] Stephen Brown: We’ve had some great talks about it so far, and we will in the future, but every bit of cashflow has to do with pre-planning. Making sure you’re on track. Wouldn’t you say, Wade?

[00:17:47] Wade Carpenter: Absolutely. But a lot of people, and a lot of the software out there that helps you build a cash flow plan is strictly long-term. But the short term is what we are operating off of. Three months, six months is the most you can go out and be accurate. But it can see a couple of weeks ahead that you’re going to be short, three weeks down the road, if you don’t do something. It can be motivating.

So to

[00:18:13] Rob Williams: I’ll tell you it’s a big de-stressor as well, just personally, just to see that. I remember, ’08, ’09, ’07. I had a daily cash flow report. We were struggling to have our receivables come in. People couldn’t pay us. And that, that was in the lumberyard and the truss manufacturing and some of the contracting things.

And, and I mean, every day we had them all listed up. This is what we’re going to pay. This is what’s supposed to be coming in and it was a daily decision. And just having that piece of paper was a major stress reliever. Just to have some idea for a short-term plan. 

[00:18:49] Wade Carpenter: Right.

[00:18:50] Stephen Brown: Well, if you’re gonna hit a deer at 500 yards or more, you gotta be able to hit that deer at a hundred yards, 50 yards. You gotta start, you gotta aim in a direction and you gotta make sure you’re practicing. And that’s the best tip I could give. Because your accountant will help you. And the more you learn about it, literally, the more interesting it will be to you. And that breeds success. Wouldn’t you say?

[00:19:18] Wade Carpenter: Absolutely. And, the other part of this is let’s talk about the entity and your strategic plan. 

[00:19:27] Rob Williams: Number four. This is number four for today. Yeah. 

[00:19:29] Wade Carpenter: I mean that, that fourth prong is, there’s, there’s a lot to that. And one of the things going back to the tax side is I like to kind of review the entity structure with a contractor.

A lot of times the contractor may be getting into a different line of business. It may have different liability. It may have some different tax consequences or say you got into developing versus, building for somebody else. There are different methods. Maybe a contractor wanted to start renting their own equipment or they bought their own building.

Well, sometimes there are ways to put it aside for liability purposes, but there also may be times where you may need those set up a different entity structure because say you’re flipping properties or something like that. So let’s talk about the entity structure.

A lot of contractors go out and do an LLC the drop of a hat because their friend did an LLC and they Google something on the internet and said, that was a good thing. But like the SALT Parity Act, if you’re an LLC structured as a sole proprietor, you’re going to lose out on that potential benefit from having that. So that may be another factor to throw in the mix for why maybe you should look at a different entity structure.

 You know, another part of the strategic plan is reviewing your profit plan. If you didn’t get the results you were looking for last year, You need to ask yourself why. What are you going to do different going into next year? If you do the same thing, you’re going to get what you’ve always gotten. I know that’s a old saying, but you know, a lot of times we’ve done things a certain way but you know, we have these sit downs with people and I vividly remember this general contractor. He would take anything and everything he could get his hands. He would bid everything. He loved to get the higher job, but we sat down and kind of segmented his jobs and said, well, you have these three or $400,000 jobs with this, it was basically a retail chain, and they would send him all over the country, but he would put these people off to go do this 10 million dollar job. And, we found out after segmenting it, he made a whole lot more money to get in, they were cookie cutter, he could do them probably cheaper the next guy, because he knew exactly what the specs were, they’d get in, get out and make great profit. 

So a lot of times looking at how your profit is with somebody with an outside perspective can make a huge difference. 

And, I guess finally just kind of wrap this up the strategic plan, which, when we do that with a contractor or, that’s a very involved process, but even if you’re doing it yourself or have somebody help you with it, you know, you may be looking at your management structure, you may be looking at the personnel you got, you may be looking at your spires and the people, again, the people you work with. Maybe you shouldn’t be working with certain owners or whatever, if they don’t pay you properly. And that’s just kind of the tip of the iceberg, but we could get very deep on, on that kind of subject. But when we do that deep strategic planning, we’re going to go into all areas of the business and probably spend a day talking about it.

And from that, we’ve gotten some huge benefits. I’ve seen some huge benefits. People finally saying, yeah, I see what you’re talking about now. I’ve always thought about it this way. Maybe we should do something different. 

[00:23:09] Rob Williams: Yeah. And this year I’ve, there’s so many potential changes planning for next year. And that has more to do with entities and, and tax things. Not, not job segmentation, but I’m just tired of seeing the article after article, after article of this is what the tax code is going to look like next year with all the changes.

It’s, it’s just, I’m finally almost wanting to block out when people are telling me what the tax laws are going to be that they haven’t passed yet because they’ve just changed. This has just been a crazy year. Maybe every year is like that, but this year seems substantially different. And we’ve started so many plans months and months ago to just say, oh, well, it doesn’t look like that’s going to happen anymore.

And just this planning all year long and going into the next year, trying to figure out what the tax acts are going to look like. But. 

[00:24:04] Stephen Brown: Right. If you’re not talking about it with your accountant and planning for it, you’re going to have some surprises that you don’t like, and you gotta say whose fault is that? My accountant not returning my phone calls? Maybe I need another accountant. Or is it because I don’t like talking about it? It doesn’t have to be that way.

Does it?

[00:24:22] Wade Carpenter: No. And, going back to what Rob said, I mean, after 30 years of doing this as a CPA, we’ll listen to what’s going on and I try to be informed, but you take it with a grain of salt. And there are certain things like, was it last year, I guess, with the PPP loans, we didn’t know until, first of the year of 2021, how they were going to treat like whether the PPP loans were going to be forgiven well, whether that was going to be taxable or not.

So we had to kind of say, this is what talking about, this is what we think is going to happen, but here’s the two scenarios and we want you to be aware of it. 

[00:25:01] Rob Williams: Yeah. And what are capital gains tax is going to be? Do we sell some of these this year or next year? Or what are we, they’re just. That’s been a lot of my issues that I’ve had conversations with. So it’s, it’s, it’s amazing. But anyway, I’m so glad to have informed people like Wade, to be able to have that conversation with, because most of my CPAs, I kind of jumped with a lot of CPAs.

We we’ve had one CPA, some for our development company, the same one for decades and decades with some other entities and jumped back and forth and didn’t know what the role was. Some of them are clearly just preparing your taxes and I didn’t understand. I thought they were all supposed to be like Wade, and they’re just not interested. Some of them, that’s not their business. Their businesses to do the taxes, not to help you plan and prepare these things. So they, those expect you to have an in-house CFO or something like that. I didn’t know where to look and how to have those conversations. And just, just understanding that every CPA does not play the same role, because it says CPA. Talk to the different CPAs and figure out what you want and what they’re offering. And when you. can get somebody like Wade, that’s a great asset to have so. 

[00:26:18] Stephen Brown: Touchdown.

[00:26:20] Rob Williams: Touchdown. That’s right. That’s right. 

[00:26:23] Wade Carpenter: There’s a lot of CPAs out there that say they do construction, but they don’t necessarily know construction.

[00:26:28] Stephen Brown: And your bond agent sure knows who they are. That’s for sure. 

[00:26:32] Rob Williams: Yeah, yeah. Stephen, any thing else on that? I mean, I guess 

[00:26:38] Stephen Brown: Wade I we’ve handled it perfectly. I’ve I’ve spoken about.

[00:26:42] Rob Williams: All right, Wade, you got any other parting notes? We’ve had, this is a great episode. This is a little bit longer than our listeners are used to. This is great information. 

[00:26:52] Wade Carpenter: I guess my final tip is get some outside help. Number one, it’d be great to have a CPA, but, even if you got somebody that does something completely different, talk to your bond agent, talk to any of your advisors. Sometimes when you get a, an outside opinion, you can get out of that tunnel vision and it can make huge strides. Just that one idea can make a huge difference in your business.

[00:27:20] Rob Williams: Yeah. And it is not just about paying your taxes. That’s not what your CPA is for. They can help you make more profits. And one thing, one point I, I wrote down to say is, remember that your example of the $10 million job or the $300 million job, don’t forget that more revenue usually means more headaches as well.

So even if it’s even there, the profits, it’s easier to run all your back information and it’s easier on you if you can make more money with less revenue. And that’s one of the summaries of what Wade was saying, but I love hearing that again and again, and I wish I had heard that 30 years ago, some of my headaches of my large volume, low profit business.

It was interesting and we may have even had large margins, but we had such large headaches that our back office, our resources, everything were tied up. So those are great points, Wade. 

All right, is that it guys for the Contractor Success Forum today? This has been an amazing episode. Please go down, scroll all the way down through all those episodes. Look at the bottom and give us a big five star rating if you liked it. If it is a one-star to you, mark that one star right in your mind. And we’re not going to tell you where the ratings are.

So five star ratings. We appreciate it. That’ll help us share that show with everybody else. So we are the Contractor Success Forum, ContractorSuccessForum.Com. We have Stephen Brown, McDaniel Whitley Bonding Agency, and Insurance and Wade Carpenter with Carpenter and Company, CPAs. And I am Rob Williams with IronGate Entrepreneurial Support Systems and we are all giving you, what is it? Insightful clarity at the Contractor Success Forum. Thanks a lot. Have a great day. And do your year end planning.