Effective tax planning for the construction industry -- method of accounting;

              Effective Tax Planning
for the Construction Industry
-method of Accounting
by Henry J. Rossi
An audit manager in our Pittsburgh office, Henry J.
Rossi is known for his activities in the construction indus­try.
He has organized and presented seminars sponsored
by the Construction Industry Advancement Program of
Western Pennsylvania, is the author of a number of pub­lished
articles, and a frequent speaker on the industry. He
represented TRB&S at the 1965 national convention of
the Associated General Contractors of America, and is a
member of the firm's Real Estate and Construction Indus­try
Committee as well as a member of our Audit-EDP
Committee.
Mr. Rossi, who graduated from Duquesne University in
1955 with a B.S. in Business Administration, has been an
instructor at Carnegie Institute of Technology's evening
school, where he taught Management Accounting. He is
a member of the American Institute of CPAs and the
Pennsylvania Institute.
The competitive pressures and the price-cost squeeze
presently in existence within the construction industry
have without doubt tended to narrow the available profit
margin. Statistics obtained in the AGC 1963 national sur­vey
indicate an average profit margin, after overhead but
before income taxes, of 2 percent. The average profit
margin was slightly higher for contractors doing a volume
of $1,500,000 or less, but held fairly steady for contrac­tors
above this volume amount. Recent statistics do not
indicate any improvement in this relatively low earnings
rate. Of course, these are averages, and individual con­tractors'
experience may deviate significantly from them.
/ However, the averages provide valid support for the
\J statement that generally contractors are working with a
relatively small margin as compared to volume.
Considering the narrow profit margin which the indus­try
must work with, it does not make much sense that a
portion of it should be used to pay income taxes that
don't have to be paid—either permanently or until some
later date. Effective tax planning may well be the device
which will provide additional working capital through
deferral or minimization of income taxes.
Effective tax planning should consider, at a minimum,
the following general attributes:
(1) Long-range as well as short-range objectives and
effect
(2) Interrelationship of the individual, his family and
his business
(3) Flexibility
(4) Sound business judgment as a cause rather than
effect of good tax planning
26 THE QUARTERLY