March 2001
Vol. 4, Issue 1

 
Many Building Contractors May Use the Cash Method Of Accounting
By Andrew S. Perry

Recent Tax Court and U.S. Court of Appeals decisions hold that building contractors can use the cash method of accounting rather than the accrual method if the contractors do not have to inventory the materials used to provide their services. These rulings are good news for some contractors because the cash method allows the contractor to defer recognition of accounts receivable until the amount is actually paid.

In Jim Turin & Sons v. Commissioner, 219 F.3d 1103 (9th Cir.2000), the contractor provided asphalt paving services, and in Vandra Bros. Construction Co., Inc. v. Com'r, T.C. Memo 2000-233, the contractor specialized in pouring concrete and making related improvements to real property. In each case the reviewing court determined that the construction materials the contractors used were ordered as needed, were fully used or discarded, and were never left on the construction site or stored for later use. Accordingly, these materials were characterized as supplies incident to the performance of the contracted services rather than as inventories. The courts determined that since the taxpayers had no inventories, they were not required to utilize the accrual method of accounting.

IRS Changes Its Position
After studying the outcome of these cases, the IRS recently changed its litigation position on building contractors. Effective February 9, 2001, the IRS will not assert the position that taxpayers in businesses similar to the ones discussed above must use the accrual method of accounting. Specifically, this new IRS position covers:

• paving
• painting
• roofing
• drywall, and
• landscaping contractors.

Unfortunately, the new guidance will not help all contractors. Those contractors that are resellers, manufacturers, or those otherwise required to use the accrual method will not be covered. Further, the cash method is generally not available to C corporations that averaged annual gross receipts of more than $5 million over the three prior tax years or the period of the corporation's existence, whichever is shorter.

For more information on the cash and accrual method of accounting and how these cases may affect you please call Andrew S. Perry.

Andrew Perry, Esq. is a member of the Tax & Employee Benefits Practice Group. He can be reached at aperry@bdblaw.com or 330.258.6479.

Recent Legislation Regarding Construction
By Clay Keller, Esq.

The recently concluded 123rd Ohio General Assembly enacted several new laws affecting the construction industry. Everyone involved in construction projects in Ohio should be aware of the following changes in Ohio law.

House Bill 122 will make it more difficult for an employee to receive workers' compensation benefits if there is evidence that the employee was intoxicated or under the influence of a controlled substance at the time of the accident. If the injured employee tests positive for alcohol or a controlled substance within various time periods specified by the law, a rebuttable presumption arises that (i) the employee was intoxicated or under the influence of a controlled substance at the time of the accident and (ii) the influence of the alcohol or controlled substance was the proximate cause of the injury. The presumption will also arise if the employee refuses to submit to the requested test. The effective date of House Bill 122 is April 10, 2001.

House Bill 401 facilitates the enforcement of arbitration agreements in commercial construction disputes. Under current law, if a contract contains an arbitration agreement, either party can ask the court to stay the trial of the case by notifying it of the arbitration clause. The court's denying or granting arbitration is a final appealable order. House Bill 401 changes this law as it applies to a commercial construction contract. Under the new law, only an order denying arbitration is a final appealable order. Therefore, the party opposing arbitration will no longer be able to immediately appeal the court's order and prevent the arbitration process from going forward. The impact of this change is to make it easier to proceed with arbitration.

House Bill 401 also makes one other significant change. Under current Ohio law, when the parties dispute whether they agreed to arbitrate, either party can demand a jury trial to decide the issue. House Bill 401 eliminates a party's right to demand a jury trial when a commercial construction contract is involved, and it directs the court to hear and determine the issue. The effective date of House Bill 401 is March 15, 2001.

House Bill 434 establishes a statewide license for contractors specializing in electrical, HVAC, plumbing, hydronics and refrigeration. These specialty contractors will no longer have to maintain a separate license for each local jurisdiction in which the contractor works. The law allows local registration but prohibits local authorities from requiring any of these specialty contractors to undergo examinations or demonstrate technical skills.

The state license created by House Bill 434 is mandatory, and no person can claim to be an electrical, HVAC, plumbing, hydronics, or refrigeration contractor without the license. In order to maintain the license, the bill requires the person holding the license to meet continuing education requirements.

Current holders of a OCIEB certificate can obtain the license by paying a fee and presenting proof of insurance that meets or exceeds minimum coverage requirements. Persons not holding a current OCIEB certificate may obtain the license by meeting various requirements, which include applying for the license within seven months of the effective date of the bill, paying a fee and showing that they have worked as a specialty contractor in Ohio for no less than the past three years. Others who want a license must pass a test and meet other specified requirements. The effective date of House Bill 434 is March 22, 2001.

House Bill 490 requires any subcontractor or supplier seeking payment on a public project's bond to make its claim within 90 days from the date of completion by the general contractor and acceptance of the public improvement by the authorized board or officer.

The new law is intended to clarify the time within which bond claims must be made. The clarification was necessary in view of a recent Cuyahoga County Court of Appeals decision in which the court reached a different conclusion on the time for making such claims than most in Ohio had previously understood.

Subcontractors should also be aware that under certain circumstances additional requirements must be met before a claim against the project's bond can be made. Specifically, if a subcontractor is not in privity of contract with the principal contractor and is claiming payment of more than $30,000, the subcontractor must have served a notice of furnishing as required by Ohio Revised Code § 1311.261. The effective date of House Bill 490 is February 12, 2001.

House Bill 491 requires that construction contracts to be performed on real estate in Ohio be governed by Ohio law and voids any provision in an Ohio construction contract that subjects the contractor to the law of another state. The bill also voids any Ohio construction contract provision that requires a contract dispute to be resolved in another state. The effective date of House Bill 491 is March 22, 2001.

Clay Keller, Esq. is a member of the Real Estate & Construction Law Practice Group. He can be reached at ckeller@bdblaw.com or at 614.227.4287.

Annual Real Estate & Construction Law Seminar
Join us for the 2001 Real Estate & Construction Law Seminar: "Updates and Strategies" on April 3 at the Hilton Inn West, Akron, Ohio. Our keynote speaker, James W. Phelps, Akron Deputy Mayor for Economic Development, will share his insight on economic development in Akron for 2001 and beyond. In addition, a variety of important and timely topics will be reviewed by BDB attorneys:

• Required Disclosures in Real Estate Transactions
  Andrew S. Perry, Esq.
• Who Wants To be A Mechanics' Lien Millionaire?
  Robert A. Hager, Esq.
• Hot Topics and Legislation
  John P. Slagter, Esq.
  David W. Woodburn, Esq.
• The "Big 10" On Making the Board of Realtors' Printed Contract Buyer Friendly
  Nicholas T. George, Esq.

For more information or to register visit the web page at: http://www.bdblaw.com/seminardetail.asp?id=8 Or contact Lorna Henderson at lhenderson@bdblaw.com or at 330.258.6473.

Builders Exchange Expo 2001

Stop by our booth in Columbus at the Builders Exchange of Central Ohio's Expo on March 20 and 21. This marks our fourth year of sponsoring the expo. We value the opportunity to participate and help the industry grow and prosper. Buckingham has provided real estate and construction law services to a wide range of companies for a number of years, and many of our attorneys have extensive experience in related positions, from construction laborer on up! We believe nothing beats first-hand knowledge and familiarity with the special issues and requirements that characterize the building industry.

Ken Fisher from the Columbus Ohio office spoke on March 5, 2001 to the Builders Exchange Of Central Ohio on Construction Contracting 101. Ken will present Design-Build Dynamics on March 22, 2001 at the Builders Exchange Expo.

Jan Hensel of the Columbus office will present Building a Solid Foundation for Effective Employment Relationships on March 21, 2001 at the Builders Exchange Expo.

If you are interested in having a speaker from BDB make a presentation to your organization, please contact: Cheryl Warren, Director of Client Relations and Marketing 800.686.2825 ext. 546 or cwarren@bdblaw.com


At BDB we are always improving our processes so that we operate efficiently and effectively. Please let us know how you like our new broadcast format. E-mail: bdb@bdblaw.com Phone: 330.258.6473 Fax: 330.252.5473. 
Thank you.

Attorneys & Counselors at Law Akron • Boca Raton • Canton • Cleveland • Columbus • Naples www.bdblaw.com Toll-Free Numbers: 1.800.686.2825 – Ohio Offices 1.800.682.2825 – Boca Raton, Florida Office 1.800.782.2825 – Naples, Florida Office