Architectural Billings Index

The March 2014 Architectural Billings Index results were published last week.  I’ve been regularly tracking this index, which is a leading indicator for construction activity (about 9 – 12 months ahead of related construction activity), for a few years now.  For more background on this index, click here…

On a national basis, the index score was 48.8, a signicant drop from the month before (50.7).  In a nutshell, any number 50.0+ indicates increased architectural billings and foretells increased construction activity.  Many pundits suggest the unusually harsh winter is the reason for the drop in the index.  The regional data suggests this may be true as in the warmer climates of the West (50.7) and South (52.8) the index was above 50.0.  The Northeast (46.8) and the Midwest (46.6) was where the index was weakest.

These regional numbers were all stronger 12 months ago.  The table below shows the March numbers for 2014 and 2013:

	West	South	Northeast	Midwest	National
2014	50.7	52.8	46.8	46.6	48.8
2013	51.9	53.6	54.6	53.9	51.9

The numbers, year over year at March, dropped for all regions but far more sharply in the colder weather climates.  If weather was a factor, we should see these numbers rebound in the Spring/Summer months.  The numbers suggest, in our region here in the West, that things are stable and growth is moderate.  The West region numbers in 2012 and 2011 were 46.6 and 47.7 respectively, so things have certainly improved these last few years.  Given this is a leading indicator, expect more of the same over the next year in terms of construction activity, that is modest growth.

Businesses in the last few years have learned to be more efficient, to do more with less.  That is always a good model, in good times or bad.  Let’s hope that more jobs, with healthier margins, go out to bid and that you can be poised to take advantage of those opportunities when they arise.

California Employee Training Funding Program

Every year, the state of California approves applications totaling tens of millions of dollars which are awarded to businesses to help offset the cost of training employees.  The areas of training covered are broad, as it says in the YouTube video below basically anything that helps the employees do their jobs better is covered by this program.

Recently one of my clients had their application approved and was awarded $50,000 to help offset the cost of their employee training.  They used a consultant to help them with the application process through approval as well as the administration and record keeping required to be in compliance with the state’s program.

The program is funded by a portion of the payroll taxes everyone pays in to the system.  I don’t believe the program is marketed widely enough and therefore not everyone is aware of it.  If my contractor was able to get their application approved, chances are good for many other contractors to benefit as well from this program.

If you have any questions, as always send me an email and I’ll do my best to help.

ITR Economics - February 2014 Update

In January 2012, I attended an economic forecast.  I’m sure many of you have attended these types of events over the years and they are generally interesting sessions.  This particular event featured Brian Beaulieu, CEO of ITR Economics and this forecast seemed different than many of the others I had attended.  The first notable difference was the time horizon discussed.  Most of the time these forecasts seem to focus on the next year, reflecting on recent economic data (at least during the presentation).  Mr. Beaulieu, an excellent public speaker by the way, presented decades worth of data which served, in part, as the basis for his predictions over the next few decades.  He did also speak back in 2012 about his outlook for the next 5 years and suggested that meaningful growth would occur in 2015 – 2017 after a few years of weak/modest growth.  He even stated that if one was thinking of selling a business in the coming years, 2017 would be a fine year to do so.  He went on to say that in the late 2020’s we could see another Great Depression scenario develop.  Time will tell how good Mr. Beaulieu’s crystal ball is.

That presentation, over two years ago, made an impression on me.  ITR publishes monthly outlooks and I thought that sharing the February 2014 report (click this link) might be worthwhile for you to review.  There is also a Steel Futures Report as well which might be of interest.  Let’s hope Mr. Beaulieu is at least correct with his prediction of strength in the next few years!

2013 Tax Depreciation Limits

I thought it might be nice to publish a summary of the 2013 tax depreciation limits for accounting and finance personnel to be able to reference.

The 2013 tax depreciation limits for Section 179 and bonus depreciation have not changed from 2012.  The American Taxpayer Relief Act of 2012 extended the Section 179 amounts for the 2012 and 2013 tax year.  The 50% bonus depreciation was also extended to the 2013 calendar year.

FEDERAL TAX

1.    Section 179 for 2013 tax year (see below) - Maximum Sec. 179 deduction $500,000.  Investment limit $2,000,000.  (If more than $2M of fixed assets additions of qualifying Sec. 179 assets, the Sec. 179 deduction phases out dollar-for-dollar, e.g., if there is $2,000,001 in additions, the Sec. 179 is reduced to $499,999 – Sec. 179 is completely phased out when total additions exceed $2.5M).  Most common non-qualifying Sec. 179 assets are Leasehold Improvements (with exceptions).

2.    50% Additional First Year Bonus Depreciation – Asset must be new.  The bonus depreciation is 50% for the 2013 calendar year.  (For example, if you have a 6/30/14 FYE client, 50% bonus depreciation will apply for 7/1/13 – 12/31/13, and as of now, there is no bonus depreciation for 1/1/14 – 6/30/14.  Congress has yet to extend bonus depreciation to the 2014 calendar year.)

CALIFORNIA – California never conforms to federal.

1.    Section 179 – Maximum Sec. 179 deduction $25,000.  Investment limit $200,000.  (Same dollar-for-dollar phase out applies – at $225k new additions, Sec. 179 is completely phased out).

2.    No bonus depreciation allowed.

TAX YEARS

The basic rule for tax years – it is determined by when the fiscal year starts.

The 2013 tax year for Section 179 is applicable for 12/31/13, 1/31/14, 2/28/14, 3/31/14, 4/30/14, 5/31/14, 6/30/14, 7/31/14, 8/31/14, 9/30/14, 10/31/14, and 11/30/14 clients.

COMMON ASSET LIVES (BNA)

1.    3 year SL – off-the-shelf software

2.    5 year MC200 – cars & trucks (see note below for limitations), computers, machinery and equipment

3.    7 year MC200 – furniture, phones

4.    15 year MC150 – land improvements (parking lot, fencing, sidewalks)

5.    27.5 year SL – Residential Real Property

6.    39 year SL – Commercial Real Property (including leasehold improvements that are structural and affixed) – certain LHI can utilize a shorter 15-year life for federal if certain criteria are met.

NOTE ON CARS & TRUCKS (SEE ATTACHMENT)

1.    Most cars and trucks are limited to the amount of depreciation (including Sec. 179 and bonus depreciation) you can take each year.  The code for listed property in BNA is “AL.”  For 2013, autos are limited to $3,160 depreciation in the first year.  If bonus depreciation is taken (auto needs to be new), the first year depreciation limit is increased to $11,160.

2.    For trucks having gross vehicle weight rating >6,000 lbs. and bed length >6 feet – can take Sec. 179 for entire cost.

3.    For (a) SUVs >6,000 lbs., (b) vans >6,000 lbs., and (c) trucks >6,000 lbs. with bed length < 6 feet – Sec. 179 is limited to $25,000.

SECTION 179 LIMIT & MID-QUARTER RULES

If Sec. 179 is being limited, and you are trying to figure out which assets to apply the Sec. 179 and which assets to not, the basic steps to take are:

1.    First, choose all the assets with the longer class life (e.g., choose the 7-year asset vs. 5-year).

2.    Second, choose the asset closer to year end (e.g., choose the asset purchased on 12/31 vs. the asset purchased on 1/1).

2014 TAX YEAR

As of today (1/12/14), Congress has not passed extensions of the §179 amounts or bonus depreciation.  This means that as of now, §179 deduction dropped back to $25,000 with a $200,000 investment limit.  Also, there is no more bonus depreciation.  We will keep you updated on the changes.I thought it might be nice to publish a summary of the 2013 tax depreciation limits for accounting and finance personnel to be able to reference.  If these limits don't particularly excite you, please forward to those tasked with knowing such things.

The 2013 tax depreciation limits for Section 179 and bonus depreciation have not changed from 2012.  The American Taxpayer Relief Act of 2012 extended the Section 179 amounts for the 2012 and 2013 tax year.  The 50% bonus depreciation was also extended to the 2013 calendar year.

FEDERAL TAX

1.    Section 179 for 2013 tax year (see below) - Maximum Sec. 179 deduction $500,000.  Investment limit $2,000,000.  (If more than $2M of fixed assets additions of qualifying Sec. 179 assets, the Sec. 179 deduction phases out dollar-for-dollar, e.g., if there is $2,000,001 in additions, the Sec. 179 is reduced to $499,999 – Sec. 179 is completely phased out when total additions exceed $2.5M).  Most common non-qualifying Sec. 179 assets are Leasehold Improvements (with exceptions).

2.    50% Additional First Year Bonus Depreciation – Asset must be new.  The bonus depreciation is 50% for the 2013 calendar year.  (For example, if you have a 6/30/14 FYE client, 50% bonus depreciation will apply for 7/1/13 – 12/31/13, and as of now, there is no bonus depreciation for 1/1/14 – 6/30/14.  Congress has yet to extend bonus depreciation to the 2014 calendar year.)

CALIFORNIA – California never conforms to federal.

1.    Section 179 – Maximum Sec. 179 deduction $25,000.  Investment limit $200,000.  (Same dollar-for-dollar phase out applies – at $225k new additions, Sec. 179 is completely phased out).

2.    No bonus depreciation allowed.

TAX YEARS

The basic rule for tax years – it is determined by when the fiscal year starts.

The 2013 tax year for Section 179 is applicable for 12/31/13, 1/31/14, 2/28/14, 3/31/14, 4/30/14, 5/31/14, 6/30/14, 7/31/14, 8/31/14, 9/30/14, 10/31/14, and 11/30/14 clients.

COMMON ASSET LIVES

1.    3 year SL – off-the-shelf software

2.    5 year MC200 – cars & trucks (see note below for limitations), computers, machinery and equipment

3.    7 year MC200 – furniture, phones

4.    15 year MC150 – land improvements (parking lot, fencing, sidewalks)

5.    27.5 year SL – Residential Real Property

6.    39 year SL – Commercial Real Property (including leasehold improvements that are structural and affixed) – certain LHI can utilize a shorter 15-year life for federal if certain criteria are met.

NOTE ON CARS & TRUCKS

1.    Most cars and trucks are limited to the amount of depreciation (including Sec. 179 and bonus depreciation) you can take each year.  For 2013, autos are limited to $3,160 depreciation in the first year.  If bonus depreciation is taken (auto needs to be new), the first year depreciation limit is increased to $11,160.

2.    For trucks having gross vehicle weight rating >6,000 lbs. and bed length >6 feet – can take Sec. 179 for entire cost.

3.    For (a) SUVs >6,000 lbs., (b) vans >6,000 lbs., and (c) trucks >6,000 lbs. with bed length < 6 feet – Sec. 179 is limited to $25,000.

SECTION 179 LIMIT & MID-QUARTER RULES

If Sec. 179 is being limited, and you are trying to figure out which assets to apply the Sec. 179 and which assets to not, the basic steps to take are:

1.    First, choose all the assets with the longer class life (e.g., choose the 7-year asset vs. 5-year).

2.    Second, choose the asset closer to year end (e.g., choose the asset purchased on 12/31 vs. the asset purchased on 1/1).

2014 TAX YEAR

As of today, Congress has not passed extensions of the §179 amounts or bonus depreciation.  This means that as of now, §179 deduction dropped back to $25,000 with a $200,000 investment limit.  Also, there is no more bonus depreciation.  

New Litigation Threat Facing Contractors

The construction industry may soon face a new wave of litigation filed by attorneys on behalf of laborers.  On October 10, 2013, Governor Jerry Brown signed into law SB 435 (Senator Padilla).  This Senate Bill, which goes into effect January 1, 2014,  is “an act to amend Section 226.7 of the Labor Code, relating to compensation.”  The amendment adds the term “recovery period” in addition to meal and rest periods as originally included in Section 226.7.  The recovery period is essentially a “cooldown” period to prevent heat illness.  This bill provides compensatory relief for field laborers who are not accommodated with shade under which the recovery period is to be taken.  These recovery periods may be taken throughout the day per Cal-OSHA regulations.  It would not be surprising to see class action labor attorneys spring into action to aid in enforcement of these provisions.

The amendment to Section 226.7 is interesting with respect to its expanded language.  It essentially adds requirements to comply with statutes, regulations and/or orders of the Occupational Safety and Health Standards Board and the Division of Occupational Safety and Health.  As such, this amendment ties Section 226.7, which stipulates penalties of one hour, per employee, per workday, that each meal or rest or recovery period is not provided, with Cal-OSHA rules and regulations.  One of the more notable regulations under Cal-OSHA is with respect to Heat Illness Prevention.  This  code section, click here for the details, requires employers to provide proper shade to accommodate 25% of the employees on the shift without having physical contact with one another.  There is a temperature threshold stated in this section requiring employers to provide this shade to be available when the temperature reaches 85°F.  It also requires the employer to provide access to shade even if the temperature doesn’t reach 85°F upon the employee’s request.  The rest periods for cooldown must be at a minimum 5 minutes to prevent overheating.  Access to shade must be available at all times.

For those wishing to read the language of Section 226.7 as amended by the bill for themselves, I’ve included it below here:

(a) As used in this section, “recovery period” means a cooldown period afforded an employee to prevent heat illness.

(b) An employer shall not require an employee to work during a meal or rest or recovery period mandated by an applicable statute, or applicable regulation, standard, or order of the Industrial Welfare Commission, the Occupational Safety and Health Standards Board, or the Division of Occupational Safety and Health.

(c) If an employer fails to provide an employee a meal or rest or recovery period in accordance with a state law, including, but not limited to, an applicable order of the Industrial Welfare Commission, the Occupational Safety and Health Standards Board, or the Division of Occupational Safety and Health, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.

(d) This section shall not apply to an employee who is exempt from meal or rest or recovery period requirements pursuant to other state laws, including, but not limited to, a statute or regulation, standard, or order of the Industrial Welfare Commission.

Although this may prove to be challenging for contractors to comply with, as always it’s best to know the landscape such as it is.  Please share this with your contractor friends accordingly so they can decide how best to navigate these requirements.

Financial Reporting Update

Back in March I wrote about the possible changes on the horizon regarding revenue recognition in the construction industry.  These proposed changes would alter how we report on construction company operations and consequently would require a significant retraining of all those who prepare and use those statements. 

There has been an effort put forth by the American Institute of Certified Public Accountants (AICPA) wherein they have created a model for financial reporting for small and medium-sized businesses.  This model, published in a report entitled “Financial Reporting Framework for Small and Medium Sized Entities" (abbreviated as FRF for SME), provides a pathway enabling qualifying entities to report via a non-GAAP "Other Comprehensive Basis of Accounting" (OCBOA).  By choosing this pathway, any burdensome changes in generally accepted accounting principles (GAAP) would not necessarily affect a company reporting under this FRF –SME.  This would enable a more cost effective and clearer methodology under which to report the results of operations and avoid any unnecessary complexities brought forth by an ever changing GAAP model while providing a clear, concise, relevant and useful report.  The costs saved would of course be primarily outside professional fees, but also internal cost savings as interim internal financial statements would also be reported under the FRF – SME model to outside users.  Beyond the cost savings, any confusion created in the market by some of the proposed changes in GAAP would be avoided.

The National Association of State Boards of Accountancy (NASBA) and the AICPA have now joined together in support of this new framework.  On July 15, 2013, the two organizations issued a joint statement indicating that NASBA will assist in the development of a decision making tool for businesses to help them decide if this reporting framework is right for them.  I suspect many businesses in the market we serve here in Southern California would be good candidates as they are privately owned and operated.

One of the greatest challenges facing those interested in adopting this reporting methodology is acceptance by the market – the users of these financial statements.  Many creditors require financial statements to be presented in accordance with GAAP.  These very same users might very well find the FRF – SME model more useful, concise and relevant to their needs vs. GAAP as it is proposed to change.  Some of the proposed changes to GAAP, besides the revenue recognition change discussed in my March posting, include accounting for leases.  The simple summary here is that essentially all leases will be capitalized.  Rent expense will be a thing of the past and the reader will see amortization of the right to lease assets along with interest expense in its place.  Banks, bond companies and others who use financial statements need to gain an understanding of the changes in GAAP coming down the road.  They need to assess how those changes will affect the reporting for the businesses they work with and whether those changes to the reporting are useful to them as creditors and users of those statements.  Given recent developments with the AICPA and now NASBA, it appears there are viable options to consider.

If the banks and bond companies could begin re-writing their credit documents such that the financial reporting/records requirement reads “financial statements to be provided in accordance with current accounting pronouncements” versus “…maintain its books and records in accordance with GAAP” then this FRF – SME framework could be an attractive option.  The markets need to take notice of these proposed changes to GAAP now so that any unintended consequences can be avoided and small to medium-sized businesses will not be burdened with the reporting requirements that are generally meant for much larger businesses.  This will help everyone involved including the users of the statements and the business owners.

Workers Comp Insurance Rates Set To Go Higher Again

This past Friday the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) submitted another pure premium rate filing to the Insurance Commissioner.  The new rate proposed is $2.70 per $100 of payroll and would be effective January 1, 2014.  This increase represents an approximate 7% increase from July 2013 and 17% over January 2012.  You might recall in 2012 the Pure Premium Rate spiked up 30% in that year.

The cost of doing business in California continues to rise and businesses must anticipate, and be prepared for, that reality.  Keep in mind that the increase in the pure premium rate is just one of several factors affecting insurance premiums.  It is a good idea to contact your broker now to determine ways to mitigate any increases you may be facing.

As I pointed out in my posting in November 2011, you must always consider your costs at the price they will be incurred when you are performing your work, not at the time of the bid.  Insurance increases, as well as anticipated materials prices or other increases, need to be considered when preparing bids.

Although these increases never come as good news to the market, I was reading the 2011 posting again wherein I noted in July 2003 the rates were $4.80 per $100 of payroll.  It’s good to keep things in perspective.