BA Harris LLP

Updated Move Date!

Published on Tuesday, November 05, 2019

Office Move Date:
Monday, November 11th, 2019 Read More...

We are moving!

Published on Tuesday, October 22, 2019

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Oregon Passes New Corporate Activity Tax (CAT)

Published on Thursday, September 12, 2019

On May 16th Oregon Governor Kate Brown signed House Bill 3427 which imposes a gross receipts tax (Corporate Activity Tax or CAT) on businesses with gross receipts in excess of $1 million, effective for tax years beginning on or after January 1, 2020. The Corporate Activity Tax includes a flat tax of $250 on the first $1 million of “taxable commercial activity” (the calculation of which is discussed below), plus 0.57% of taxable commercial activity over $1 million. This is an additional tax, meaning it does not replace any existing taxes, and covers all industries except for certain “excluded persons” which includes some non-profits, hospitals, and long-term care facilities.

The foremost concern for our clients is, of course, whether or not this new tax applies to their situation. Although the tax is called a “Corporate” Activity Tax, it will be levied upon all partnerships, Corporations, LLC’s, trusts, estates, and sole proprietorships that have both of the following:

  • Substantial nexus with Oregon
  • Taxable commercial activity in excess of $1 million
  • Under the CAT, there are many ways for businesses to meet the definition of having substantial nexus with Oregon, and does not require the taxpayer establish a physical presence in Oregon. Businesses are considered to have nexus with Oregon if they have, or meet, one of the following requirements:

    1)At least $50 thousand in Oregon payroll or property

    2)Oregon commercial activity of $750 thousand

    3)At least 25% of their total payroll, property, or sales located within the state

    4)Maintain residency or a commercial domicile in Oregon

    5)Hold a certificate of existence or authorization to do business in Oregon issued by the Oregon Secretary of State

    6)Own or use a part or all of the taxpayer’s capital in Oregon

    Taxable Commercial Activity is computed as gross Oregon receipts, minus 35% of either Oregon sourced “cost inputs” or “labor costs” (whichever is greater). According to the bill, “cost inputs” refer to cost of materials in the creation of a good or service, and the cost of purchasing inventory, while “labor costs” refer to the total compensation of all employees except for any single employee making in excess of $500 thousand. Excluded receipts include interest and dividend income (although interest on credit sales would be included), gains from disposition of capital assets, proceeds from stock issuance, contributions to capital, income from passthrough entities, and rebates. Also included in income would be property transferred into Oregon from out of state. Within one year, the value of all property transferred into Oregon for the taxpayer’s own use in the course of trade or business shall be included in the total of taxable commercial activity. However, if the Department of Revenue determines the taxpayer’s receipt of property outside of Oregon was not intended to avoid tax, this addition will not apply.

    The CAT is required to be filed annually with required quarterly estimated payments. All businesses with Oregon nexus and at least $750 thousand in commercial activity (not limited to such activity in Oregon) must register with the Department of Revenue (DOR), but will not have a CAT liability until they reach $1 million in Oregon taxable commercial activity. All businesses with an excess of $1 million in commercial activity from all state sources (not limited to such activity in Oregon) will be required to file returns, but will not be subject to the tax.

    If you have any questions regarding this new tax and its potential impact, please let us know.

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    Best of Treasure Valley – Runner-up

    Published on Thursday, September 05, 2019

    We are very excited to announce that we were runner-up to Eide Bailly in the annual best of Treasure Valley vote for best accounting firm. We appreciate each and every one of you who took time to vote for us this year. We look forward to providing all of our clients with outstanding service in the year ahead and hopefully we can come out on top next year! Read More...

    Unallocated Job Costs

    Published on Friday, August 02, 2019

    Chances are your construction company is underestimating the cost on each specific job. The process of obtaining bids and estimating project costs is straight forward when it comes to direct expenses such as subcontractors, direct materials, and direct labor. Those direct costs provide a guide to profitability from job to job but don’t account for the overall cost of doing business. So, while a 10% gross profit margin per job seems obtainable, by year end when all Costs of Revenues are accounted for gross profit might be just 5%. That is because unallocated expenses incurred throughout the year are included in total Cost of Revenues but didn’t get included in the individual job estimates.

    When reviewing company financials, it has been our experience that Cost of Revenues typically exceed the total costs reported by job by a significant amount. The source of this difference is indirect costs which include many basic expenses such as employee benefit pay (paid time off, holiday, and sick pay), tools and supplies, vehicle expenses, insurance, equipment repairs and maintenance, asset depreciation, and rent. All of these expenses relate to completing jobs but cannot be trace to any one particular project. The indirect nature of the costs presents an added complexity in cost allocation which is why such indirect costs are often unaccounted for in the job costing process.

    Allocating indirect job costs to specific projects will provide managers and estimators with the real cost of each job and can lead to more accurate bids and assist in reaching profitability goals. There are different approaches to allocating indirect costs depending on the nature of work performed. A basic approach includes the following steps:

    1) create cost pools of expenses

    2) determine a rate for the cost pool

    3) apply that rate to each job estimate and actual results

    Cost pools

    A cost pool might be equipment costs that aggregates such items as depreciation, fuel, insurance, and repairs which is commonly known as equipment burden.

    Another common cost pool consists of labor costs including worker’s compensation insurance, benefit pay, and health care or other employee benefits which is referred to as labor burden.

    Burden rates

    Calculating an initial rate is inherently just an estimate and is usually based on prior year financial data. The rate should be evaluated periodically but at least annually during the budgeting process. To establish an equipment burden rate, divide total expected equipment costs by the total expected equipment hours across all jobs. For example, if the equipment cost pool for last year was $100,000 and the company expects to use all equipment a total of 10,000 hours in the coming year, the burden rate for the upcoming year is $10/hour for each equipment hour. If desired, you can even set up different burden rates for different kinds of equipment.

    For the labor burden rate, divide total expected indirect labor costs by the total expected labor hours for the year. For example, if indirect labor costs were $100,000 in the prior year and the company has five employees who each work 2,000 hours per year for a total of 10,000 labor hours, the burden rate for the upcoming year is $10/hour for each labor hour.

    The formula for a burden rate is flexible and the choice should be assessed by management for appropriateness. If direct material costs are the driver of most job costs in the business then perhaps the rate should be calculated based on that metric rather than equipment hours or labor hours. Thus, if direct material costs for all jobs in the prior year were $1,000,000 and total equipment and labor cost pools were $200,000 then for every dollar of direct material purchased $.20 would be allocated to the job to account for indirect costs.

    Allocation of costs

    Once the burden rate has been established, the contract bid should include cost estimates for how much of the cost pool will be used on that job. In accounting for the actual results, software programs may automatically apply the rate to the job against resources used such as labor hours or equipment hours. If not, a manual allocation may be necessary.

    A job that is expected to use five hours of equipment will have $50 of indirect costs from the equipment cost pool added to its bid estimate. If in reality the job used the equipment for only four hours $40 of equipment burden will be allocated to the job.

    At the end of the year, all indirect costs should be allocated to jobs. If costs remain unallocated then the burden rate was too low and if more costs were allocated than indirect expenses incurred, then the rate was too high. The job costing process is by nature based on estimates. The better the estimate the more predictable results your company is likely to experience. BA Harris can help your company improve its job costing estimates by evaluating what costs to include in cost pools, establishing burden rates, applying those rates to your actual results, and assisting in the decisions for the best technology tools to support your costing needs. Please contact us if you would like assistance with this process.

    Karris Kimball

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