Tax Tips for Portable Restroom Operators

Use this advice to navigate the various complications that tax season brings

Tax Tips for Portable Restroom Operators

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Tax season is here and portable restroom operators need to start working on properly filing for their business.

Portable sanitation businesses have a lot of moving parts with a team of employees and income streams that need to be reported in different ways. This can make tax filing a complicated process. As a partner for a CPA firm that helps contractors file their taxes, I wanted to share a few tips to better prepare you for tax season this year as well as in the future.

How and when you report income matters

With pumping, installing or any specialty contractor business, the biggest issue in the tax world is your accounting methods, which impact how and when you report income on your financial statements.

Two common methods to file is either the cash basis or the percentage of completion method.

Cash basis accounting is the simpler concept and it is most often used by smaller businesses. Cash basis accounting simply means that when you receive money you recognize it as revenue. Traditionally most contractors like to see things on a cash basis since it is mostly straightforward and the tax obligation is in the same year the cash is received.

Generally, you can only use the cash method if you are under $25 million in revenue. Many bigger businesses use the percentage of completion method. The percentage of completion method is an accounting method in which revenues and expenses of long-term contracts are recognized as a percentage of the work completed during a period. For example, a contractor installing a system can record revenue based on how much of that job is complete. Put simply, if you complete 50% of a job, you record 50% of the revenue.

The way you record your revenue is dependent on your individual situation and I would recommend discussing the best option for you with a tax professional.

Be aware of AMT

The American tax system is complicated and no contractor is expected to be a tax expert. Still, you should know some of the key things that really have an effect on contractors. One is the Alternative Minimum Tax. AMT places a floor on the percentage of taxes a filer must pay to the government. AMT recalculates income tax by adding certain tax preference items into gross income.

The biggest problem most contractors have with AMT is that you generally calculate your AMT income using the percentage of completion method. Small companies may find themselves out of compliance with AMT because they calculated their original income using the cash basis method and calculated their AMT the same way. It is an area where many companies may not be compliant and it is due to this one simple mistake.

Understand PPP loan compliance

During the peak of the pandemic, many businesses applied for and received Paycheck Protection Program loans from the federal government. These loans will be altered to grants if a company used the money to maintain payroll during the pandemic. However, they are a bit more complicated than that. If the company had other debts, these may have covenants requiring it to maintain a certain amount of assets to its liabilities. A loan covenant is a clause in your loan agreement that requires the borrower to do or refrain from doing certain things.  

Secondly, some states do not maintain the same rules as the federal rules. The federal rules allow the forgiveness to be treated as a tax-free grant as well as allowing a deduction for the expenses paid using the PPP money. Companies will need to review the rules with their state to see if the loan forgiveness is taxable income.

Know sales tax in the states you work in

Income tax from state to state is generally uniform, but sales tax is all over the place. If you are a multi-state company, you will have to deal with different tax laws. Some states charge sales tax on materials while others pay sales tax on the job itself. For example, in Arizona, sales tax is different for repair jobs and large projects. If you do a repair job, you pay taxes on the materials. If it is a large improvement/new construction job, you pay sales tax on the entire job itself. 

Understanding the sales tax in the states you work in will save you a lot of time and money down the road.

Tax time can be a complicated and stressful time for contractors, but taking the time to organize everything and considering some of these tips will help make it a little easier.

About the author: Phil Wuollet is a CPA and partner at Epstein Schneider, PLC, an accounting firm in Scottsdale Arizona. The staff at Epstein Schneider helps clients with tax compliance as well as developing forward-thinking strategies for reducing and deferring taxes.


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