Overview - Construction

Question 1

What is TPP?

Answer 1

Any property that can be held, smelled, touched, seen, tasted, or which is perceptible to the senses and not permanently affixed to real estate.

Question 2

What is real property?

Answer 2

Land, Buildings, and TPP that gets incorporated into real property (TPP must get incorporated, must have the intent of being permanent, and must not be easily removed without causing substantial damage)

Question 3

What is a prime/general contractor?

Answer 3

A person (or other legal entity) who enters into a contract to with another person (or other legal entity) to erect, construct, alter, repair, or improve real property.

Question 4

What is a subcontractor?

Answer 4

A person (or other legal entity) who is hired by the prime contractor to conduct a specific task.

Question 5

What is a lump-sum contract and what is another name for it?

Answer 5

• A contract for a set dollar amount.
• Fixed price contract

Question 6

What are “Cost plus” and “Time and material” contracts?

Answer 6

Contracts that show separated amounts for labor (time) and materials.

Question 7

What are the 3 types of contract clauses and what does each one do?

Answer 7

• Agency clause: Allows the contractor to act as an agent of the buyer and benefit from the exemptions that the buyer would benefit from.
• Grandfather clause: Creates an exception from the law for something that existed before the law went into effect.
• Tax clause: Shows which party has the responsibility to either reimburse or directly remit tax to the taxing jurisdiction.

Question 8

What are the 5 step in the bid and proposal process?

Answer 8

1. Contract will receive an invitation to bid on project.
2. Project plan and specifications are reviewed by the contractor.
3. The contractor prepares a document estimating the cost of materials, plus tax, labor, overhead, profit, etc.
4. The bid is submitted to the customer/prime contractor.
5. If the customer/prime contractor accepts the bid, the contractor begins the contract setup process

Question 9

What are the 4 guidelines of the contract setup process?

Answer 9

• Price should be based on applicable law
• All tax duties should be included
• Contract acceptance document should be drafted (defines performance requirements, scope of work, and deliverables)
• Indemnification clause should be included (to protect against any damage caused by negligence, misconduct, or misrepresentation)

Question 10

Who is usually considered the ultimate user or consumer of all materials, tools, and equipment purchased to perform a construction contract?

Answer 10

The contractor

Question 11

In….. contracts, the contractor will pay tax on the purchase of their materials used for the project, but in…… contracts, the contractor will usually be able to buy them tax-exempt as a “sale for resale” since they’ll be separately stated from the labor on the invoice.

Answer 11

fixed/lump-sum, cost-plus/time-and-materials

Question 12

In construction contracting, what two things determine the method of taxation applied?

Answer 12

• Type of work performed
• Type of contract

Question 13

What are 3 types of documentation you’ll need for an audit when reviewing construction contract work?

Answer 13

• Contract/SOW
• Invoices
• Change Orders

Question 14

What are some key things to do on the tax side of things when there is a potential construction contract that will be started?

Answer 14

• Get involved in the bid process to ensure tax is treated correctly
• Know what the tax statute for your specific jurisdiction says about construction contracts
• Ensure proper tax is paid on materials/tools/equipment
• Retain all of the key documentation that would be asked for in an audit