Get Ready for 2023 - MCC Construction Zone

mccarthy. cpa

MCC Construction Zone

Proactive Advice for Construction and Real Estate Professionals

In This Issue

In this issue of MCC Construction Zone, we provide tax planning strategies for businesses and individuals, as well as new guidance on the Employee Retention Credit and provisions of the Inflation Reduction Act. As we approach year-end, it is important to consider last-minute tax strategies for 2022 and what you should do for 2023.

I also provide insights on improving your bottom line in 2023 Construction Perspective: Bracing for the Unknown, Planning for Success. In today’s economic climate, we must be more strategic next year to maintain or increase customers, revenue, and profits. Invest in key areas for maximum impact. Develop comprehensive tax, business, and operational plans. You may not be able to control outside influences that impact your business, but you can control what goes on inside your company.

In firm-related news, we recently acquired New Jersey-based Frank Leonard & Associates, LLC, and hired partner John Blake, formerly of Klatzkin. We introduce you to them in Meet Our New Partners. In addition, we are expanding our New Jersey presence to serve our clients better. McCarthy will move into a 6,600-squarefoot office space in One Hovchild Plaza in Tinton Falls, N.J., to accommodate the growing team.

We hope you enjoy our latest issue, and please get in touch with us with any questions regarding the material. From all of us at McCarthy, we wish you a happy holiday season and prosperity in the New Year.

Marty McCarthy, CPA, CCIFP Managing Partner

Marty McCarthy, CPA, CCIFP

Please note that we will be closed from December 26 – January 2, so our employees can enjoy the holidays with their family and loved ones. We will reopen on January 3, 2023. Happy Holidays from

2023 Construction Industry Perspective: Bracing for Uncertainty, Planning for Success

McCarthy, CPA, CCIFP

For organizations that made it through 2022, the shift from surviving to thriving hasn’t been seamless, as many may still find themselves victims of circumstances outside their control. A one size fits all panacea for the construction industry is impossible. Each sector faces unique challenges while balancing compliance and legalities and adapting to new industry trends.

The last two years have been turbulent for the construction sector. But as 2022 comes to a close, experts at Dodge suggest the needle will move, and momentum will pick up for the industry in 2023.

“Construction is at a pivotal moment surrounded with opportunities to innovate and reimagine its trajectory with new practices that impact the bottom line and contribute to positive societal changes. Despite the clouds on the horizon, the future of construction remains bright.” - Dodge Construction Network Year End Report.

Even in the face of optimism, the fact remains that current market dynamics suggest 2023 will experience variable growth rates across different industry segments as the country, as a whole, teeters on recession.

Marty

For those industry experts expecting a 2023 recession, there remains to be a determination as to how prolonged or severe the downturn will be. Still, current economic trends and aggressive federal interest rate hikes suggest the recession won’t be long-lived. In addition, while increased costs and supply chain issues still hinder many businesses, our clients cite the labor shortage as their primary challenge, indicating they have work in the queue but not enough staffing.

With the global economy slowing down and the 2023 projected growth of the US economy lingering beneath 1%, a thorough understanding of the cyclical nature of the construction industry is paramount, as threats to bottom lines range from mild to severe, depending on industry segment, size, and location. In addition, supply chain issues, labor shortages, and increased fuel and material costs continue to impede progress for many organizations.

Construction clients, for example, that deal in commercial construction will have vastly different years depending on what type of facility they are building. In addition, retail office space is moving slowly and has become less attractive after the COVID-19 pandemic, even with signs that many companies will return to their offices.

On the other hand, medical facility construction continues to be profitable and in high demand. This may be fallout from the COVID-19 pandemic, but the long-term future for these types of facilities seems bright.

For companies constructing warehouses, 2023 will likely remain the same as the demand for flexible warehouse space remains strong. If a recession hits, there may be a slight dip in demand, but the impact on this sector shouldn’t be significant.

For residential real estate construction companies, 2023 is going to be a challenge. The increased interest rates have caused a serious lull in the housing market, and if rates continue creeping up, inventory will be harder to move.

While eliminating obstacles in each sector may only be possible in some cases, there are ways to ease their burden. Although there may not be a one-size-fits-all solution in the construction field, laying the foundation for a successful 2023 starts now by identifying opportunities for efficient tax planning and implementing proactive strategies for the year to come.

Tax Planning

Tax laws are evolving to meet the needs of new trends and business models. Therefore, organizations should consider how to maximize the opportunities or minimize the implications of both new and existing policies, such as:

168(K)

In addition, the Tax Cuts and Jobs Act of 2017 significantly changed the tax consequences of business structures. Therefore, depending on a business’s financial health, it may be time to consider if a change in structure is warranted.

Careful attention should also be paid to retirement savings plans, which could reduce modified adjusted gross income and help reduce or avoid the Net Investment Income Tax. Finally, exit planning should be a top priority for those considering retirement. Getting a company ready to sell or conduct a family succession could take years.

A solid tax plan could be a differentiator between success and failure, especially on the heels of the last two years in the construction industry.

Business and Operational Planning

Efficiently and effectively monitoring and controlling investments and construction costs helps businesses stay competitive. Taking inventory of current processes and improving internal controls to improve cash flow, increase profitability, and boost financial security should also be part of planning for 2023. For some organizations, digitization through automation, AI, and even robotics will significantly impact safety, design, and efficiency, thus increasing bottom lines over time and presenting opportunities for R&D credits.

For companies looking to grow and for companies struggling to stay afloat, planning for strategic acquisitions and mergers may be a winning solution, especially with interest rates on the rise. A word of caution, however, is that 2023 may not be the time to branch out into a new construction sector. Instead, organizations should focus on procuring profitable projects in their niche and doing what they do best.

This does not mean, however, that construction companies shouldn’t consider ways to embrace new trends. For example, with the cost of building materials such as concrete and gypsum rising and increasing demand for green construction, smart buildings, and structure rehabilitation, companies will need to factor in how to reduce building material costs while sourcing sustainable materials. If this isn’t possible, now is the time to consider how to stock store materials in advance. Making this transition takes careful planning and budgeting and should be part of any robust 2023 tax plan.

In addition, it’s an ideal time for teams to perform a thorough internal audit. Organizations should take inventory of their subcontractor prequalification process, job costing processes, internal bookkeeping, employee management systems, cybersecurity, and financial reporting procedures. Where is there room for improvement? Are there metrics in place to capture relevant data? Are KPIs pertinent and useful? An all-encompassing tax plan will shore up weaknesses and provide strategic solutions for future growth.

Final Thoughts

It has yet to be determined what will ultimately happen in 2023. But with the current economic indicators pointing towards a recession, it is imperative to be diligent with business plans. These uncertain times call for strategic preparation and planning.

A proactive tax plan is not just about filing taxes, deferring large expenditures, and limiting lines of credit; it's an investment in strategies (including keeping a healthy cash reserve) that can carry an organization through difficult economic times.

It’s important to remember that even with the most efficient technological advances, it is still the workforce that enables the construction industry to thrive. In the face of the current labor shortage, organizations need to accomplish more with fewer employees. Incorporating the costs of training,

apprenticeship, and certification programs into 2023’s tax plan can pay off in the long run by helping reduce turnover and securing more engaged, committed workers.

The Construction Services Team at McCarthy & Company, PC is uniquely positioned to advise clients within the construction industry. Our team of industry-leading advisors helps clients manage their businesses more efficiently, control operating costs, improve cash flow, obtain financing, and meet surety bond requirements. Always in the know, we deliver up-to-date, proactive solutions that will enhance our client’s profitability.

About the Author

Marty McCarthy, CPA, CCIFP, is the managing partner of McCarthy & Company. Sureties and bankers respect Marty for his high-quality work and profound understanding of the construction industry. Marty helps clients by giving them the insight needed to grow their businesses. He can be contacted at 610.828.1900 or marty.mccarthy@mccarthy.cpa

Marty McCarthy, CPA, CCIFP

Year-End Tax Planning for Individuals

Kim Delany

Do you wait until the last minute to file your taxes? If so, you're not alone because about one in three Americans procrastinate when filling out their annual IRS forms. Legislative changes and inflation make waiting to get your taxes in order seem like a wise option. However, for 2023, you'll need to consider how inflation will impact your returns. The higher your wages, the higher your tax bracket and tax percentage burden will be. Another factor to consider is how the midterm elections might result in tax changes being either included or excluded from December's budget reconciliation bill.

Procrastinating too long, however, has its disadvantages. The longer you wait, the more likely you will make an error on your return, face an audit, or even miss the deadline. These consequences are undesirable for every taxpayer, so it makes the most sense to streamline the process by prepping your taxes as much as you can before the tax year ends. Then you can make any last-minute changes in the final weeks before you file.

If you're currently sifting through this year's records and compiling your year-end tax documents and data, we've outlined some tips to help you organize and prepare for next year's taxes.

When in Doubt, Defer Here's a tip you'll want to take advantage of when you file your taxes next year. Of course, everyone is aware of the historically high inflation right now, but did you know that you could use these high rates to your advantage? You should consider deferring any income to 2023 rather than 2022.

Why?

The tax brackets for 2023 will be higher because of the current inflation rates, which means you’ll be able to take advantage of these new rates if you defer your income. According to the IRS’s recent announcement, here are the new tax brackets for 2023:

• Income: below $11,000 individual, $22,000 married – Tax rate: 10%

• Income: $11,000 individual, $22,000 married – Tax rate: 12%

• Income: $44,725 individual, $89,450 married – Tax rate: 22%

• Income: $95,375 individual, $190,750 married – Tax rate: 24%

• Income: $182,100 individual, $364,200 married – Tax rate: 32%

• Income: $231,250 individual, $462,500 married – Tax rate: 35%

• Income: above $578,125 individual, $693,750 married – Tax rate: 37%

Tax brackets change yearly based on the annual inflation rates, but thanks to record inflation this year, 2023's adjustments are pretty drastic. This upward adjustment equates to an income tax cut because taxes will apply to less of your income, and you'll pay fewer taxes on the income that does get taxed. Remember, though, that these rates only apply to earnings after January 1, 2023. So, when in doubt, defer that income to 2023. Of course, every person's tax situation is unique, so it makes sense to consult with an accountant or financial advisor before you defer.

Itemize Charitable Contributions

This tip might apply to your situation if you regularly contribute to charity. Over the past few years, the standard deduction taxpayers can claim has increased and is indexed for inflation, changing how many individuals itemize deductions on their tax returns.

When you file, you can either take your itemized deductions or accept the standard deduction, but you can't do both. Since the standard deduction has increased so much over the past few years, more taxpayers receive a more significant benefit from the standard deduction than the itemized deductions, including charitable contributions. Therefore, if you take the standard deduction, you do not receive any tax benefit for charitable contributions you made during the year.

One way to receive the tax benefit of charitable contributions and itemize your deductions is to consider bunching your charitable contributions into one tax year. For instance, you could bunch together both 2022's contributions and 2023's contributions into one year. By doing so, your itemized deduction might exceed the standard deduction, which will lead to a tax benefit.

Up Those Retirement Contributions

Consider maxing out retirement contributions for the year before you file your taxes. While this option isn't always possible, it's great if you can afford it. Here's why:

• Contributions to certain qualified plans are tax-deductible or are pre-tax, lowering your taxable income

• Your employer might match your contributions depending on the terms of your retirement plan

• Your overall tax burden may get reduced

• You’ll enjoy the advantages of growing your retirement account tax deferred if it is a qualified plan

When contributing the maximum amount possible to your retirement accounts, one important consideration is how your employer will treat your contributions. In many cases, your employer will match your contributions dollar-for-dollar. However, other employers might match your amount by up to 50%.

Capital Losses Can Offset Gains

Another practice you can benefit from is tax-loss harvesting. Before the end of the year, reposition yourself by identifying and selling any underperforming investments. Then you can use those capital losses to your benefit come tax time. How so? By using those losses to reduce your taxable capital gains. Generally, this is a good tactic in a year when you have significant capital gains. Additionally, you could offset up to $3,000

of your ordinary taxable income per year using any remaining capital losses. If the capital losses are not used in full in the current year, they carry forward to the next tax year.

Lower Your Account Value with a Qualified Charitable Distribution

If you hold an IRA and you've reached the age of 72, you should know that you'll now be obligated to take a required minimum distribution (RMD), or a specific amount of funds from your account, every year. You'll have to take these funds even if you don’t need or want them.

When you receive these RMDs, it will increase your taxable income. In other words, these mandatory RMDs might kick you into a higher income tax bracket, limit your tax deductions, or even cause higher taxes on your Social Security income.

One way to avoid this situation is to use a qualified charitable distribution instead of accepting your RMD funds. In other words, you can fulfill your RMD requirement without receiving the funds as income by directly transferring the amount (up to $100,000) to charity. In addition, this qualified charitable distribution will not increase your taxable income.

Don’t Forget About Estate Planning

Remembering your estate planning goals while prepping your end-of-year taxes is essential. You'll want to do whatever you can to minimize your estate tax liability in case the worst happens to you in the coming year. In addition, since tax laws are constantly in flux and the midterm elections could impact these laws, it is necessary to estate update your plans to reflect your estate planning goals.

Consider Your Children's Futures

If you have children, you might also be interested in learning more about 529 plans. 529 plans allow family members, friends, and others to contribute to your child's college fund with after-tax income. These contributions are tax-free, and any earnings on the money are not subject to another income tax when they get withdrawn by the student later for educational expenses. Although there is no federal tax benefit, depending on your state, you might be eligible for state income tax benefits on these 529 contributions.

Going Green Can Save You Some Green.

The current administration has always touted the goal of making the country greener and more ecofriendly. The Inflation Reduction Act reflects that by allocating $1B towards loans and grants to improve climate resilience, water efficiency, and utility bill relief to those in need.

If you're a homeowner, you can take advantage of these new changes by installing energy-efficient upgrades to your home. These green updates will result in tax credits, ultimately cutting your tax bill. In addition, if you're considered a low- or moderate-income family per the bill, you might also be eligible to receive rebates for any energy-efficient appliances you purchase.

Now that 2022 is wrapping up, it's a great time to prepare for 2023's tax season. But, of course, there's still a while before Tax Day in 2023, and the midterm elections might result in some tax changes, and there's a good chance that inflation will impact your taxes, too. So, with that in mind, you should revisit your tax situation before filing.

About the Author

Kim Delany, tax services director, is well-respected for managing the accounting and tax aspects of her client’s operations, so they can focus on growing their business and becoming more profitable. Kim can be contacted at (610) 828-1900 or kim.delany@mccarthy.cpa.

Kim Delany

Year-End Tax Planning for Businesses

John Blake, CPA, MBA

Between supply chain issues, rising inflation, and emerging from the COVID-19 pandemic, 2022 has been challenging for many businesses. In addition, there is some uncertainty around tax planning as the mid-term elections could play a vital role in the budget reconciliation that will be due around the middle of December. However, now that the year is wrapping up, it's important to remember that despite the challenges, there's still some time left to consider some key end-of-year tax planning strategies, some of which we outline below.

The 15% Corporate Alternative Minimum Tax

There's been a considerable buzz around the 15% corporate alternative minimum tax (AMT) going into effect in 2023 due to the Inflation Reduction Act of 2022 (IRA). If you own a business, you're likely wondering how the AMT will affect you.

The good news is that the AMT will only apply to your business if you have a net book income of over $1B. Considering that this income threshold does not apply to most companies, it likely will not apply to yours.

Of course, the midterm elections could impact how much tax your business pays next year. The Biden administration's "Green Book" 2023 budget includes a new proposal to increase the top corporate rate for C corporations from 21% to 28%. The stated reason for the tax increase is to help pay for the green goals outlined by the Biden administration. It would also go into effect starting on January 1, 2023. However, it remains to be seen whether this proposal will go into action next year or if additional changes will be made.

Defer New Invoices Until 2023 Where Possible

Another hot topic right now is inflation. It’s no secret that we’re all living through an age with historically high inflation. As a result of these changes, the IRS has also updated the income tax brackets for 2023. If you want to take advantage of these new rates, then it might make the most sense to defer any new invoices until 2023.

Deferring new invoices will provide multiple benefits. Not only will that income likely be taxed less since 2023’s income thresholds will be higher, but you’ll also minimize your tax liability for the current year’s returns (2022). But, again, this is contingent upon what happens with the budget reconciliation near the end of the year.

Take Advantage of the Last Year of 100% Bonus Depreciation

Did your business make any investments in capital assets in 2022? Then, you should work that into your end-of-year tax plans if you still need to.

Why? Because 2022 is the last year, your business can take advantage of 100% bonus depreciation for tax purposes. In 2023, it drops to only 80%.

So, what is bonus depreciation, and how can it benefit your business? In a nutshell, it is a tax break for businesses that allows them to deduct up to 100% of the purchase price of eligible assets. Considering that this fourth quarter of 2022 is the last chance you'll have to get the 100% bonus depreciation, it might be a good idea to make qualifying investments now if they make sense.

Maximize the Qualified Business Income Deduction

Another expert tax tip for the end of 2022 is to consider maximizing your qualified business income deduction. A qualified business income (QBI) deduction allows taxpayers that receive income from passthrough entities to deduct up to 20% of their qualified business income when they file their annual tax returns. This deduction is available regardless of whether you itemize or take the standard deduction. Here is who will qualify for 2022:

• Single filers: $170,050

• Joint Filers: $340,100

If your taxable income exceeds these figures, then the QBI may be limited depending on several factors, including the nature of your business.

Check to See If You Qualify for the Employee Retention Credit

Under the CARES Act, your business might qualify for the Employee Retention Credit (ERC). The ERC is a refundable tax credit that could bring a business a maximum refund of $26,000 per employee if your company meets the gross receipts reduction or government shutdown requirements. While the ERC will no longer apply to new wages you pay out, you can still claim the credit retroactively on past paid wages. You have until July 31, 2023, to look back and determine if you qualify for the first potential quarter of eligibility.

Temporary 100% Deduction for Business Meal Expenses

Under the Consolidated Appropriations Act, all restaurant meals are 100% deductible throughout 2022. Taking advantage of this deduction in these final months is crucial because it will go back to 50% in 2023. To qualify for the 100% restaurant meal deduction, the following apply:

• Have had a business owner or employee present at the meal

• Meals must be from a restaurant for immediate consumption

• Payment for the billing must be between December 31, 2020, and January 1, 2023

• The meal isn't extravagant

This deduction is a great business opportunity that you can use to help foster relationships with new or existing business partners.

Understand the Pass-Through Entity Tax Program

If your business is considered a qualifying pass-through entity, you can pay an entity-level state tax on income in about 31 states. The tax is paid directly by the pass-through entity to the state. This pass-through tax is optional and requires an election to participate, so you may wonder what the incentive is to pay this tax. The tax is considered a business expense and would lower the individual’s federal taxable income. In addition, the individual would get a credit for the taxes paid on their state income tax return.

Know the R&D Deduction Rule Changes for 2023

The IRA and Tax Cuts and Jobs Act (TCJA) both impact the research & development credit for businesses. Before the TCJA, a company could immediately deduct 100% of the total cost of an R&D investment. Beginning January 1, 2022, companies will be expected to deduct their investment costs over five years instead.

The good news is that the IRA will double the maximum R&D credit you can use to offset your payroll taxes. Before, the amount was capped at $250,000, but now the maximum will be $500,000. This rule will go into effect on January 1, 2023, and generally applies to start-up companies.

1% Excise Tax on Corporate Stock Buybacks

Here's another tax change you'll want to be aware of as we head toward the end of 2022. Starting next year, stock buybacks by covered corporations will be subject to an excise tax of 1%, but this new change only applies to buybacks after December 31, 2022.

While the mid-term election results might result in some tax changes, and the inflation rate could also alter things, year-end tax planning is imperative to the success of your business. McCarthy & Company’s Tax Services Group has extensive experience helping businesses with their endof-year tax planning, and we can help you, too. For more information, or if you have questions about the material outlined above, please contact us.

About the Author

John Blake, CPA, MBA, is a tax partner in the firm’s New Jersey Office. Considered a valued advisor, John is passionate about helping entrepreneurs, closely held businesses, middle market companies, and individuals make more money by delivering comprehensive financial management services. John focuses on a company’s key performance indicators to determine where clients should focus their attention so that minor issues do not become significant challenges. Contact John at (732) 341-3893 or john.blake@mccarthy.cpa.

John Blake, CPA, MBA

Take Another Look at the Employee Retention Credit

Brian Marron, CPA

One of the most valuable tax incentives to come out of the COVID-19 relief funding was the Employee Retention Credit (ERC). The ERC provided the needed funding to ensure those adversely impacted by the pandemic could continue to retain full-time employees. Unfortunately, like the Paycheck Protection Program (PPP), the ERC underwent several modifications. Not only did this include changes to eligibility criteria but also the formula for credit calculation. As a result, the credit came to a close three months earlier than expected when the Infrastructure Investment and Jobs Act was signed into law.

However, even though the program closed, it’s not too late for employers to file an amended return and claim the benefits. Whether due to confusion around initial eligibility, or the provision for supply chain disruptions, it’s a good idea to take another look at the ERC, the details of which we examine below

ERC Timeline

Employers that kept payroll for W2 employees during the pandemic may have been eligible for the ERC, a refundable credit against certain payroll taxes. Because it was a quarterly tax credit, employers could file for the credit throughout the year and get money back quicker than waiting for a refund from an annual tax return.

But because four different versions of the same credit changed eligibility and calculations between 2020 and 2021, many employers were confused about whether they qualified. If they weren’t sure, they didn’t file, potentially leaving money on the table. Here’s a quick summary of the major changes:

MCC Construction Zone

The ERC was first introduced in March 2020 with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This iteration was effective between March 13, 2020, and December 31, 2020. It provided a 50% credit against the employer’s portion of Social Security taxes from an employee’s first $10,000 in qualified wages. The total maximum benefit was $5,000 per employee per year.

To qualify, employers must have been fully or partially closed due to a government order in any quarter or experienced at least a 50% decline in gross receipts compared to the same quarter in 2019. There were differences between small employers (less than 100 employees) and large employers (more than 100 employees).

The ERC was unavailable to certain types of not-for-profit entities and colleges or universities at that time. Also, the ERC was not available to employers that received PPP funds during that time.

January 1, 2021 – June 30, 2021

The ERC was extended for the first time in the Taxpayer Certainty and Disaster Relief Act of 2020 (Relief Act). It was expanded to 70% of an employee’s first $10,000 in wages each quarter for a maximum benefit of $28,000 annually. Employers need only prove a 20% decline in gross receipts to qualify. The threshold for small and large employers also expanded from 100 to 500 employees; calculations for eligible wages differed depending on whether the number of full-time equivalent workers was under or above that number.

Eligibility was also expanded to include certain tax-exempt employers classified under Section 501(a) and colleges or universities. The Relief Act also allowed employers to take advantage of the ERC even if they received PPP loans.

July 1, 2021 – September 30, 2021

Initially, the American Rescue Plan Act (ARPA) extended ERC through the end of 2021 for all employers, but the credit was retroactively terminated in the Infrastructure Investment and Jobs Act (IIJA).

For the third quarter of 2021, employers could still take a 70% credit against the first $10,000 in wages, except that the credit only offsets the employer’s share of Medicare taxes, not Social Security. The ARPA also expanded the credit for severely financially distressed employers, which were defined as having experienced a decline in gross receipts of at least 90% compared to the same quarter in 2019.

October 1, 2021 – December 31, 2021

The ERC was only available to recovery startup businesses in the fourth quarter. They were defined as a business that began operations on or after February 15, 2020, with average gross receipts of $1M or less. The limit was $50,000 per quarter.

If an employer may be eligible during one of these periods, it’s worth a second look from a qualified CPA. The calculations can be complicated, and it’s important to get the claim right or risk leaving money on the table.

Supply Chain Disruptions

Another way to qualify for the ERC is through the supply chain provision. Most employers did experience a supply chain disruption during the pandemic, but the IRS threshold for what qualifies as an eligible disruption under ERC is a high bar to meet. Broad, indirect impacts won’t be enough.

To qualify, an employer’s full or partial suspension of operations must be directly traced to a specific government order that caused a supplier to suspend shipment. That’s not all. The employer must also

satisfy all three preconditions listed below.

• The supplier was unable to fulfill a shipment of necessary supplies.

• The employer was unable to find an alternative supplier or materials.

• The employer was negatively affected as a result.

Federal and state regulations and orders limiting travel, commerce, or group gatherings are acceptable, but they must be specific. For example:

The state imposed a 50-person maximum threshold for indoor gatherings, so the supplier could not operate at total capacity. Thus, it was unable to meet order deadlines. The employer could not source similar materials from another supplier and had to adjust output or change its processes. Or,

A federal order restricted the number of workers at an international port, which caused unexpected shipping delays. The employer could not fulfill customer orders and suffered a loss in revenue.

However, a supplier’s inability to deliver an order because it experienced a labor shortage or unexpected increase in demand would not qualify.

Manufacturers are more likely to qualify for supply chain disruption than most employers, given the nature of the business. However, it’s not limited to any specific industry, and other restrictions are usually in place. Employers must look at the bigger picture and understand that the IRS carefully examines supply chain disruption claims, considering all facts and circumstances.

Correcting ERC Mistakes

Since the ERC calculations and eligibility changed so much and the calculations are complex, it’s possible that a mistaken claim could have been made. In many cases, mistakes surrounding the ERC were by accident, though there are still cases of ERC fraud that the IRS is pursuing more aggressively.

The following are some of the mistakes that employers could have made in claiming false tax credits:

• Claiming a credit against a manager’s wages

• Claiming a credit against a family member who is also an employee

• Sole proprietors claiming for themselves

• Counting payments to independent contractors as eligible wages

• Including wages before March 13, 2020

• Claiming ERC against wages that were already covered by PPP funds or the Work Opportunity Tax Credit

Employers that have questions about the accuracy or validity of a past ERC claim can request a second opinion. If a mistake is found, it can be corrected within three years. To fix a past claim – or submit a new one

– employers would file an amended Form 941.

There is an interplay between the ERC and PPP forgiveness as well. You may have filed for an ERC refund without maximizing the ERC with the PPP forgiveness. Taking a second look at the ERC calculation and the PPP forgiveness can help ensure that both programs are maximized.

The Employee Retention Credit is a compelling tax incentive still available to eligible companies. Now is the time to explore this opportunity or take a second look to ensure potential savings are claimed. This is especially true if you filed a claim 9-12 months ago and have yet to receive feedback.

Please contact us if you have questions about the material outlined, need a second opinion on your ERC claim, or need information about the services our Tax Group provides. We look forward to speaking with you soon.

Meet the Author

Brian Marron, CPA, is a manager in the firm’s New Jersey office. He helps clients reduce their tax obligation by planning through the tax implications of complex transactions. Brian can be contacted at (732) 341.3893 or brian.marron@mccarthy.cpa.

Brian Marron, CPA

How the Inflation Reduction Act Impacts the Construction & Real Estate Industries

David Gibbs, CPA, CCIFP, CRE, MBA

President Biden signed the Inflation Reduction Act of 2022 (IRA) into law on August 16th. The IRA is designed primarily to reduce climate change’s effects, increase corporations’ taxes, and lower prescription drug costs. The bill contains several tax provisions that directly affect individuals and businesses alike. An example of a key provision is the 15% minimum tax rate for corporations. Any corporation earning $1B or more will be tasked with paying the 15% tax rate. Although they weren’t advertised as much, many provisions in the IRA impact the construction and real estate industries, which we examine below.

The Inflation Reduction

Act’s Impact on Construction Companies

One industry that benefits the most from the IRA is the construction industry. A top provision in the bill provides grants for using low-carbon materials and products when working on federal highway administration projects. These grants amount to $2B, which are available as reimbursements or incentives to any eligible recipients.

Another key feature of the IRA is the inclusion of $2.15B for low-carbon buildings, which is explicitly meant to install low-carbon products and materials in General Services Administration-owned buildings.

If a construction company wants to perform affordable housing projects, Section 30002 of the IRA states that $4B will be provided to improve the climate resilience of affordable homes. In this scenario, construction companies can obtain funding to improve the home's water or energy efficiency, sustainability, and indoor air quality. It's also possible to install low-carbon materials, products, and technologies to bolster climate resiliency. Another provision the construction industry can take advantage of involves improving the 179D deduction. Before the IRA was passed, building owners could obtain a tax deduction after installing energy-efficient systems.

MCC Construction Zone

The deduction amounted to $1.88 per square foot. After the IRA, this deduction increased to $5 per square foot if prevailing apprenticeship and wage requirements were met. Changes have also been made involving who qualifies for this deduction.

In 2006, the 45L tax credit was made effective. This credit allowed owners to obtain a $2,000 tax credit per dwelling unit for developments that consumed far less energy when compared to national standards. With the passing of the IRA, 45L credits have been extended to the end of 2032 and are retroactive to the beginning of 2022. This credit amounts to as much as $5,000 for every dwelling unit.

The IRA has also added much more funds for the environmental review of construction projects. In addition, construction labor mandates for apprenticeships have also been tied to tax incentives involving renewable energy projects. However, keep in mind that this particular provision could also be an issue for some construction companies if the project takes more time to complete due to additional scrutiny during environmental reviews.

The Inflation Reduction Act’s Impact on Real Estate Investors

When looking specifically at real estate investors, the IRA provides some notable tax advantages for owners focusing on energy efficiency and renewable energy. For one, investing in renewable energy should substantially reduce your utility costs, rising across many areas of the country. If you currently pay utilities for some tenants, the increased costs of fossil fuels throughout 2022 have likely resulted in high energy bills for you.

If you invest in renewable energy and go green with your property, you may qualify for substantial tax rebates. These changes can also help you earn a certain amount of clean energy credits directly from your utility, which should lower your annual utility costs.

Several grants are being made available for affordable housing if water or energy efficiency improvements are made to the property in question. Property owners who install energy-efficiency windows, air conditioners, doors, furnaces, heaters, and other home systems can claim home improvement credits. While these credits were available in the past, they only covered 10% of the total costs of these home improvements up to a max of $500 or $200 for windows.

Beginning in 2023, it's now possible for property owners to claim a credit that amounts to 30% of total costs for energy-efficient improvements. In addition, the $500 lifetime limit for home improvements has increased to an annual limit of $1,200. However, installing an energy-efficient water heater or boiler can net you a tax credit of as much as $2,000.

With the passage of the IRA, it's clear that there are many tangible benefits for the real estate and construction industries. If you work in either sector or have invested in properties of any kind, the grants and tax advantages provided by the bill could help you save a considerable sum of money.

About the Author

David E. Gibbs, CPA, CCIFP, CRE, MBA, is a partner and head of the firm’s Real Estate Services Group. He works with real estate professionals in various commercial, industrial, and residential sectors. In addition, clients benefit from David’s profound knowledge of the tax elections for real estate professionals. He can be contacted at (610) 828-1900 or david.gibbs@mccarthy.cpa.

David Gibbs, CPA, CCIFP, CRE, MBA

New Jersey Expansion

Marty McCarthy, CPA, CCIFP

McCarthy & Company is experiencing rapid growth organically and through mergers and acquisitions. As reported in NJBIZ, the leading business publication in the Garden State, the firm is ending 2022 on a big note: expanding its team and moving into a new office in Tinton Falls to accommodate its growth.

We expect to move into our new office in New Jersey by mid-December. At more than double the size of our current suite in the same building, the fully branded and the renovated office is located at One Hovchild Blvd., 4000 Route 66, Tinton Falls The office will accommodate 19 staff members — nearly three times that of its 2017 headcount in NJ.

Frank Leonard & Associates merged into the firm effective November 1. Based in Forked River, the firm specializes in providing accounting and advisory services to the trucking and bus sectors of the transportation industry

The firm’s new Tinton Falls entrance will look very much like its reception space in Blue Bell, Pa., pictured here.

“I’ve worked with clients in the trucking and transportation segment for more than 40 years and understand the financial, risk, operational, capital, and tax issues unique to the industry,” said Frank Leonard, who joins McCarthy as a partner. “I’m excited to be joining the McCarthy team, where I know my clients will receive exceptional client services and where I can continue to grow my book of business.”

MCC Construction Zone

Ken Kang and Jennifer Leonard also join McCarthy from Frank Leonard & Associates. Kang is a client accounting services associate, an arm of the practice focused on providing businesses with a comprehensive suite of outsourced accounting solutions, while Jennifer Leonard is an administrative assistant.

John Blake, formerly of Klatzkin, joined McCarthy as a tax partner on November 7, bringing 18 years of tax and accounting experience. Blake will serve as point-of-contact for all former Frank Leonard & Associate clients. Beyond tax and accounting work, he’ll also focus on tax-related business development, thought leadership, enhancing tax offerings, and providing additional leadership to the tax team.

“We’re thrilled to welcome Frank Leonard, his team, and John Blake to McCarthy. Their combined expertise will allow us to continue to provide superior accounting services to the sectors we currently serve and expand further into the transportation industry,” said Marty McCarthy. “These investments in our firm now are the foundation for continued expansion and growth in the future, both in personnel and industries.”

This article was initially published in NJBIZ on November 22, 2022, which you can read here

Meet Our New Partners

Kerrianne

Brady

John Blake, CPA, MBA, is a tax partner in the firm’s New Jersey Office. Considered a valued advisor, John is passionate about helping entrepreneurs, closely held businesses, middle market companies, and individuals make more money by delivering comprehensive financial management services. John focuses on a company’s key performance indicators to determine where clients should focus their attention so that minor issues do not become significant challenges.

A cum laude graduate of Rider University, John holds a Master of Business Administration degree and a Bachelor of Science degree in accounting. He is a lifelong resident of Monmouth County, NJ, where he takes full advantage of living near the Jersey Shore. John and his wife and two children (ages 10 and 6) enjoy going to the beach every chance they get, especially in May and September.

A soccer enthusiast, John was a member of the Jersey Shore Boca Soccer Club. However, he hung up his boots at age 18 after playing for nearly 15 years. An avid New Jersey Devils fan, John dreams of the career that could have been. All kidding aside, John is just as enthusiastic about reading as soccer. It is not a consequence that John is currently reading The Trusted Advisor by Robert M. Galford, Charles H. Green, and David H. Maister. He finds books on being a better and more valued advisor to his clients particularly interesting. Many topics are discussed that good advisors should consider when working with their clients. The authors argue that the key to professional success is the ability to earn the trust and confidence of clients. Contact John at (732) 341-3893 or john.blake@mccarthy.cpa.

Frank Leonard, CPA, is delighted to be joining the McCarthy team as a partner. He’s a CPA with over 40 years of experience servicing closely held companies and their owners, focusing on transportation and logistics. He’s a member of the New Jersey Society of Certified Public Accountants (NJSCPA) and the American Institute of Certified Public Accountants (AICPA). Frank’s previous firm has been a successful Participant in the AICPA’s Quality Review Program since its inception in 1989.

Frank’s focus on transportation began in college when he was employed as a loader and sorter for a national trucking company. Frank describes his tenure there in two words – Character Building! Frank has worked with clients in the Transportation industry for his entire career. He understands the financial, risk, operational, capital, and tax issues transportation owners face and shares his expertise, providing a service beyond traditional accounting, tax, and financial reporting.

In his free time, Frank is an outdoor enthusiast: he enjoys cycling, walking his lovable but not very smart boxer Max, and boating on the Barnegat Bay with his wife Jennifer, family, and friends. He loves spending as much

Frank Leonard, CPA

John Blake, CPA, MBA

MCC Construction Zone

time as possible with his three daughters, sons-in-law, and two grandsons. He’s also a diehard NY Jets fan.

A Stockton University graduate, Frank earned a Bachelor of Arts degree in business studies. He is an admirer of Vince Lombardi and John Wooden, two of the most successful and quoted coaches in their respective sports. Frank’s two favorite quotes are, “The will to win is not nearly so important as the will to prepare to win.” – Vince Lombardi and “Be more concerned with your character than your reputation because your character is what you really are, while your reputation is merely what others think you are.” – John Wood

Frank can be contacted at (732) 341-3893 or frank.leonard@mcccarthy.cpa.

About the Author

Kerrianne Brady is the director of operations for McCarthy & Company. She oversees and enhances the firm's day-to-day operations and works closely with firm leadership to strategize and develop long-term plans that usher in new levels of productivity, growth, and success for the firm and its employees. Kerrianne can be contacted at (610) 8281900 or kerrianne.brady@mccarthy.cpa.

492 Norristown Rd, Ste. 160 ● Blue Bell, PA 19422 4000 Rte. 66, Ste. 323 ● Tinton Falls, NJ 07753 610.828.1900 (PA) ● 732.341.3893 (NJ)

mccarthy.cpa