Avoid These Tax Traps! Year-End Planning Guide for Construction Contractors

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ℹ ABOUT THIS EPISODE

Every contractor faces year-end tax decisions, but spending money just to save on taxes can destroy your cash flow.

Join Wade Carpenter, Stephen Brown, and guest Maureen Weick as they reveal the biggest tax planning mistakes contractors make and share practical strategies for year-end planning that protects your cash flow, maximizes your financial statement, and keeps your bonding intact. 

Learn how to plan smart, avoid emotional money decisions, and set your construction business up for success in the new year.

⌚️ Key moments in this episode:

• 00:32 Meet Our Special Guest: Maureen Weick
• 01:59 Common Contractor Mistakes
• 02:54 The Importance of Planning Ahead
• 04:32 Balancing Tax Savings and Cash Flow
• 05:57 Year-End Financial Planning Tips
• 07:16 Understanding Bonding and Financial Statements
• 09:30 Good Debt vs. Bad Debt
• 19:35 Seasonal Business Considerations

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

[00:00:00] 

Wade Carpenter: Every year about this time, guys start treating tax deductions like a clearance sale at Home Depot. Trucks, tools, TVs for the office, all in the name of tax strategy. Meanwhile, January shows up asking where the rent money went. If you have to spend money to save money, you're not saving, you're decorating the problem.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter & Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance.

It's that time of year again to start planning for year-end. We've got a very special guest today, Maureen Weick. She and I have been friends for about four or five years, I think. She's a dedicated listener to our show and she's also a Mastery Certified Profit First Professional. Also one of the few, like me, that sticks in the commercial realm. She and I have had some great conversations over the years and I'm really glad to have her on the show today.

Maureen, thanks for being here. Can you tell us a little bit more about yourself? 

Maureen Weick: Well, thank you Wade for having me [00:01:00] on and nice to meet you, Stephen. I am based in western Michigan. I have been working in the commercial construction world for a very long time. My father was a general contractor, and I started working in his office when I was 15, learning just basic accounting. And then from there I went on to working in different commercial contracting companies. And then in 1992, I started my own bookkeeping firm. And I've been doing it, sticking in the commercial construction industry because that's what I know and that's what I like. You guys are a lot of fun. So this is a great podcast and I would like to encourage all commercial contractors to-- even if you're not a commercial contractor, just any contractors. Listen to this podcast. There's a lot of really good topics. 

Stephen Brown: Thanks Maureen. Appreciate it. [00:02:00] You've got construction in your blood, you deal with and help contractors all the time. Just like we were talking about before the podcast started, we have seen so many things that the same contractors all over do time and time again that just hurt them. We are tired of it. We just want them to be aware of it. These are red flags. These are a behavior that's gonna cost you in the end.

Wade said, for example, the whole mindset of spending money to save money. I don't know what that is, Maureen. I mean, contractors go broke figuring out how to not pay taxes. They're obsessed with it. Some of them are so obsessed with it that it makes me crazy as their bond agent. They're gonna gut all their cash from their financial statement. They're gonna live as hard as they can through that company and absolutely deduct everything. And they're just going to beat it and beat it. I guess you can if you want to. If that's what you wanna do, that's fine.

I would say, and I would beg them, open your mind to think about a broader way of [00:03:00] running your construction company, that includes maybe pre-planning in a way where you get what you want, but you're also building something that has value. That you can sell someday or that your employees might enjoy working with you and enjoying benefits, bonuses, sharing profits who knows? Sky's the limit, isn't it? 

Maureen Weick: It is, and I try to encourage them, really look at your purpose. Look at what you really want your life to look at, what you want your company to look like. Begin with the end in mind. And begin with the idea that you're going to sell this tomorrow. Try to do everything right right now so that you could sell it tomorrow if you wanted.

It's a mindset. Money is emotional, so they have to get their plan in place ahead of time so they don't make off the cuff decisions. 

Stephen Brown: That's so true. Here in Memphis, first Tennessee Bank had years ago this commercial of money, [00:04:00] walking around just doing dumb stuff. And it was really funny. But you're right, money is emotional, if you let it be that way.

You and Wade, that's what you deal with. Measuring it, accounting for it, predicting when it'll come in, how it will go out. And so much you can't even do your job if you don't know what it is that owner that you're trying to help wants to accomplish. 

Wade Carpenter: Yeah. And today I think the thought is we're back in that season. The planning season. Too often for years, I've always thought my job as CPA, save me on taxes. Especially with the Profit First and trying to get people bonded, people think that, okay, I gotta go buy that truck.

And it's sort of like my wife going out there saying everything is 20% off at Target, and she saved me so much money that it took two carts to do that. You know? I'm not sure how much we really saved when she did that, but that's the mindset that's out there.

What I was hoping we could do today, maybe Stephen could give us some thoughts, maybe some scenarios. How should we approach it, maybe [00:05:00] from a Profit First mindset, from a healthy company mindset? What do you think about that? 

Stephen Brown: Well, first thing I think is I hope your wife doesn't listen to our podcast, so you're, you're in trouble.

Wade Carpenter: I'm sure. 

Stephen Brown: No, that's a great analogy. It is a mindset. Maureen, what I wanted to share with my customers, this time of year is so vital to me as a bond agent. We're getting out there saying, have you talked to your accountant? Where are you toward getting your year-end? What is your accountant telling you to do?

I had a situation where like a Subchapter S corporation, they were told you've got too much cash, and they dumped it all in every possible way. They hurt their working capital, their cash, and hurt my ability to get them bonded.

It was bad advice. It ended up costing them a lot of money. I think what Wade was saying earlier about prepaying now, and it catches up at some point in January when you can't make payroll, or what else do you see in this regard? 

Maureen Weick: Yeah. I try to encourage my [00:06:00] contractors: let's start early October, and start thinking about year end. What is the profit gonna look like? What does your cash look like? What's the plan?

We try to start the conversation early. I like to meet with them October, November, December, just to remind them, you made a plan. Are you working the plan? Don't get to year end and say, oh, I'd really like that shiny new truck. If it wasn't in the plan, don't do it.

I try to get them out of the mindset that I gotta save on taxes. I try to make them realize their first thought should be cash flow. How is this gonna affect my cash flow? Get out of the "I gotta save on taxes" mindset. 

Wade Carpenter: That's exactly the way I think about it. October, November, we don't wanna wait until late December or January. It's too late to do something about it.

Planning for a contractor has to be the three prongs that you just basically said. Yeah, we wanna minimize [00:07:00] our taxes, maximize our financial statement, and then that third prong is let's not screw up our billing so that we don't have the rent money in January, February.

What do we need to be thinking about? What do those ratios need to be looking like? Stephen, I know you always want some liquidity, but what are your thoughts on that? 

Stephen Brown: Well, first thing is I want all our listeners to know that most people have their corporate year end December 31st. Some have it June 30th. I have some that have it April 30th. It just depends. But a lot of my customers have December 31st fiscal year end. And so that snapshot by their CPA is what I need to get bonding, and they put that together on either an audited or a review basis. And that's what allows me to get your bonds for the whole next year. It's the number one tool I need as a bond agent to do my job for you.

And so every time I get that financial statement year end, sometimes I'll get them, Maureen, in June, July, August. You know they're bad when you get them that late.

Nevertheless you get those financial [00:08:00] statements and I look at it and you say, okay, how much working capital is there? Current assets minus current liabilities. How will the bonding company, there's certain things that are listed that they'll throw out. What are they gonna see as working capital? And then what's your net worth? Then I see, did you make money for the year?

And then I go to the WIP, or Work In Progress, job schedules. It's completed jobs in progress. And I see have they been having profit fades? What's their Backlog Gross Profit look like?

Then I go back and read the notes, because bond companies love notes and financial statements. They go crazy over them. It makes them nuts. So, please, CPAs, if you're listening, throw a bunch of notes in your statements.

But nevertheless, that's my tool, Maureen. Most of my whole year's worth of work depends on that tool, and the ability to get something in June. If it's December 31st, it's fairly accurate in-house information to keep things going.

Maureen Weick: Yes I try to stress to the contractors, always keep in mind what does the [00:09:00] bonding company want to see? Because that's the way you're gonna grow your business is to increase your bonding, but you also can't let the bonding be your driver in your business. 

Stephen Brown: Yeah, it can't be the tail wagging your dog. 

Maureen Weick: No. No, not at all. 

Wade Carpenter: Maureen and I have been talking about it, I've been trying to get her on for a little bit. She had recently like, hey, what would you do in this case? Would you pay down debt, buy some equipment? What should these people do?

This time of year, this is the kind of things we should think about. From a Profit First standpoint, paying down debt, that does take profit. And it does mean you're gonna end up paying some taxes on some of that stuff, because you gotta have profit to get rid of that debt.

But light bulb moment, sometimes, maybe you want to get out of that debt so you can enjoy some of that.

So Steph en, have you got any scenarios like that?

Stephen Brown: Sure. There's so much that happens in accounting, and percentage of completion accounting, accrual accounting, where at the year end, you're making certain amount of money and you wanna defer it till the [00:10:00] next year.

Well, that's the beautiful thing about these accounting methods, is the IRS lets you do that and you don't wanna pay too much and you don't wanna pay too little. I guess I'd kind of like to ask you both how you see that. How's the best way to position that? Today, bonding companies can buy in to a good game plan. Well, you know, oh, we deferred this tax, we did this, we wanted to prepay this, but then again, this is gonna help us out here. And that kind of communication helps me.

Wade Carpenter: I think about it from a couple of different standpoints. What is the plan? And I absolutely agree that if you can tell the bonding company what you're doing and the purpose for doing it. A lot of times we may have a cash basis taxpayer and a lot of profit dumped in on one year because you got a whole bunch of retainage that hit in January, February that you didn't plan on.

So, there can be different avenues. The way I approach it is, okay, what are the ratios gonna look like? And as Stephen mentioned, yeah, you got different, you know, maybe cash for tax purposes, percent complete for bonding [00:11:00] purposes. And you do have different scenarios that again, going back to some of these things like do we buy a truck? Do we rent our equipment, do we go investing in repairs and those kind of things?

Stephen Brown: The numbers and the plan might mean that you need to get a new truck for yourself or for your employees, and that's okay. We keep talking about a shiny new truck. I know I want one. But I think Maureen, maybe what you were saying though is just the obsession. I want this and I don't wanna pay taxes. Wow. This is great. I've won on two different levels. I got my truck and I minimized my taxes. What's wrong with that? 

Maureen Weick: Yeah. So I try to-- again go back, let's plan out ahead of time and is it in the plan? There is such a thing as good debt. If they don't have the cash, if they analyze their cash flow in the upcoming expenses and cash doesn't make sense to take on a payment. But they have to look into the mindset of [00:12:00] what's their ROI? If they are going to buy that piece of equipment or that truck at the end of the year, how long is it gonna take you to get the return on your investment? Is it worth it? Was it a necessary expense? Did it help pay for itself?

Stephen Brown: Oh no, I know exactly what you're talking about. I mean, think of a vehicle as any other piece of equipment. It's a lot easier to think about a piece of equipment's return on your investment when you think of how many hours you can get of use out of that equipment, whether you own it or rent it, whatever you decide. You apply the same thing to trucks is what you're saying too.

Wade Carpenter: There is a difference between good debt and bad debt. Are you gonna be doing something where you are having cashflow problems in January, February, and take out one of these exorbitantly expensive loans that are all gonna be current liabilities versus something that can pay over time? That's gonna hurt your working capital a lot less. So there are other considerations there. December we're talking about [00:13:00] Christmas bonuses and owner draws and things like that. Have you got some thoughts on those kind of things? The owner wants to go buy a new truck, wants to go buy that fishing boat, you know, that they don't really need in January. 

Maureen Weick: I try to encourage my contractors to put guardrails in place and, especially if there's multiple owners, have the plan in place. Have your guardrails in place so when it comes to year end, you're not making that emotional decision. You're gonna go back and look at your plan.

So for Christmas bonuses, did you fund it? Is the money there? If you didn't, how are you going to pay those? And if you decide to pay them, and maybe they're a little less than prior years, have a conversation with your employees. Communicate with them so they know, you know where things are standing. You don't have to share all the numbers, but at least communicate with them. You can't hurt your employee [00:14:00] morale and just say, well, no money this year, and that's the way it is.

Stephen Brown: I think that makes a lot of sense. I'd also add from bonding standpoint, my perspective, maybe do those owner distributions after the first of the year to get ready for the taxes that you're gonna have to pay. And then they're reflected in the June statement, and the bonding company says, okay, you made X amount, there's been X amount of distribution. It's gone for taxes, it's gone for owner bonus. Okay, we get it.

Because that's the name of the game, isn't it? The owner's got to pay themselves. That's the key fundamental to Profit First. The owner has to pay themselves. And also that the owner meets the goals of the income they want. That's what the bonding companies want as well. 

Wade Carpenter: And from a Profit First standpoint, I think more about like, okay, if you're gonna have bonuses in December, well can you start putting one or 2% aside, so that you've got it and you're not making these rash decisions?

I had a situation 25 plus years ago where an electrical contractor gave out $50 bonuses to all his [00:15:00] electricians, and one of them gave it back and said, you must need this more than I.

And I know that was one of those things that struck me as funny at the time, but you know, you can say whether somebody was ungrateful or not. If people come to expect that, and you do have that bad year, sometimes you can say that. But if you can put that money aside just because you don't have it, that's a different story.

Maybe we can talk about doing retirement contributions and things like that, and how the bonding company would look at that, if you can explain that kind of stuff. Maureen, you got any thoughts on that? 

Maureen Weick: Yeah, the year end retirement. They forget that they have to maybe consider paying that. And so, I completely agree. You need to work toward setting that money aside for these annual type expenses.

Stephen Brown: I'm fascinated by what you're talking about because from your perspective, you see it all the time. These things that are so important that a lot of contractors just don't [00:16:00] think about, especially as the year end comes up. 

I think about what I need to do my job. You think about what you need to do to help them with taxes. And also produce accurate accounting information, giving them good advice. Maybe you should consider this or not consider that.

As I was listening, I was just kind of laughing, thinking back in my 40 something years of being in this business, of all the things that I've had contractors do through the company that just amazed me. Back in the sixties and seventies, owning lake houses was a tax deduction. Everybody had corporate retreats everywhere. That was a big thing.

I was thinking back about airplanes and helicopters, restaurants, mobile homes, boats. Just had a customer bidding on a federal job that needed them to purchase a push boat. We were talking on the phone looking at websites and both of us were picking out luxury-- we were picking boats. I wanted him to have it so I could enjoy it too. But it was absolutely crazy.

[00:17:00] Fortunately they did not get that job and that didn't happen, but you know, it's a fun business and you wanna be able to do what you wanna do. But from a corporate standpoint, you can still do that. Just do it personally. It's okay. Because having your company own all your assets...

I was telling you about the expensive RV recent purchase by one of my customers. Oh, wouldn't it have just been better if he had just bonused himself and handled it personally? What other benefits could he have done if he had just analyzed it a little bit instead of done it?

Wade Carpenter: Yeah, there's a lot of things to think about there. I think about like these retirement contributions. Did you put money aside for it? This is a time that you probably need to be paying in some estimated taxes or bonus taxes out.

I still believe in tacking on a profit sharing plan on to your 401k, and that is a great way to have a contractor make some decisions about profitability, but the profit is still there. And I can tell the bonding company, hey, we [00:18:00] did this for tax purposes and we can see this was really profit, but this was discretionary spending. They appreciate that. But if you wait until the last minute you don't have the cash, then that's a different story.

So again, going back to the Profit First consideration for taxes, estimated payments, Maureen, I'd love your take on that. 

Maureen Weick: Well, I try to lay it out to the contractors. Think about your cash management system like your house. You have to have a roof over your head. So you have to set money aside to someday replace that roof. It's the same type of concept. You have to set money aside. These taxes are coming. You have to plan for that. That is like the roof over your head. It's not gonna disappear. It's a necessary evil. And on one hand it's a good thing. That means you have profit. That means your business is doing what it's supposed to do. Just plan accordingly for that.

Wade Carpenter: Yeah. 

Stephen Brown: [00:19:00] I'm sorry, that's just so wonderfully mind, blowingly true. And it's just your perception of it. I love the fact that you said it just means you're making money. You're doing what you're supposed to do, so quit trying to fight it. Why fight it so hard when you don't have to? 

Maureen Weick: Yeah, you can be creative. You don't have to just not pay attention and not take advantage of tax strategies, but plan for it and don't be afraid of it.

Stephen Brown: I love it. 

Wade Carpenter: Let me throw one other thing into the mix. I already talked about the cash flow, and I think Maureen and I talked about this, the Profit First standpoint. When we're talking about a plan, we do have seasonal businesses. A lot of contractors cannot work in January, February, March.

And so that's another thing that I think we need to not forget is that, hey, we're gonna spend all our cash, and then we don't have operating expenses to make it through those slim months.

So Maureen, have you got some thoughts on what contractors should be doing to address the seasonality [00:20:00] issue?

Maureen Weick: I sure do because I am in the north, I'm in Michigan. So we are very seasonal up here for some of the trades. We try to look at everything, for instance, with excavating contractors. We don't look at their work season as 52 weeks. It's more around 34 weeks. We try to base planning expenditures in the cash flow on 34 weeks.

In the down season, hopefully there's money set aside. So I tried to encourage a drip account, so they put winter expense going out the door into that drip account, and then through the winter they can still cover their bills without touching lines of credit and that sort of thing. We have to plan for it all the time up here in Michigan. 

Wade Carpenter: Absolutely.

Stephen Brown: And all your equipment has to be maintained and working perfectly when it's go time. 

Yeah, so with my heavy equipment contractors, I try to [00:21:00] encourage them to start what we call a repair and maintenance bank account, and allocate funds over there. And if you can, over allocate so that in your down season you have that cash sitting aside when you have the time in the down season to do the repairs. Now the cash is there.

I was thinking about hunting and fishing camps that the company needs to own to keep their employees happy in the winter season. I could totally live in Michigan. I mean, there's always something to do. 

Maureen Weick: Well come on up. Just come to the west side because it's the pretty side.

Wade Carpenter: Okay. Well, thank you for that, Maureen. Today has been a great episode. It's very timely this time of year, and you really need to be thinking before January 1st. It's too late to do anything about it.

And so what we're hoping you do is think a little more about, are you digging a deeper hole by going and buying that truck, and having a six or seven year note on that truck that you're gonna be paying and expensing up front? It's a compounding problem.

[00:22:00] Think about where you're going with the profitability, your cash flow, as well as you need to take into account taxes. But also, don't forget, Stephen, the bonding picture. It could be a big item for you.

So, Maureen, thank you for being here today. I don't think we mentioned, you're a Sage 50 specialist. I know you do bookkeeping for contractors all over the country. Mainly Sage 50, but I know you work with some other packages. But any parting thoughts on that?

Maureen Weick: Yeah, Sage 50, in my opinion, is very good for job costing. Job costing is critical, and I know it takes extra steps, extra time. But it really helps you drill down and keep things on track. That's why I prefer the Sage 50 program. I've been working with it for a very long time, so I understand it and know how to set it up so that it will look like what it needs to look like for the different types of industries that you're in.

I guess my parting thought would be cash flow. Think cash flow on everything you do. Cash flow.

[00:23:00] Thank you so much for having me on. This was a lot of fun and I'm a nerd. I could go on for days about all these different topics. So thank you again.

Stephen Brown: I hope you'll come back and we can do some more of this.

Maureen Weick: I would love to. Thank you.

Wade Carpenter: I very much appreciate it, Maureen, and it's good getting a different perspective on some of this stuff too. So, we appreciate you being on.

For our listeners, if you have any questions, thoughts, comments about the way we said things today, you're planning, ending the year up, got comments or questions for Maureen, we can put those in the comments below, and we'll make sure your questions get answered.

We do this every single week. We appreciate it if you consider like, share, subscribe, do all that stuff, that always helps the channel out and we will see you on the next show.