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Legislation’s Scary New World Order

In June in Toronto, the wealthiest of the Group of Twenty nations released a statement promising to halve their government deficits by 2013 and cap debt ratios by 2016, so as to avert financial crisis anew. To do that wealthy countries will, of course, have to coordinate pull back on spending. While the United States would like to spend more, the time has come, leaders say, for international economic stimulus to wind down.




Far from Toronto, where protesters rioted and G-20 leaders watched World Cup soccer matches between planning sessions, a journalist in Omaha, Neb., and the president of a major wall-and-ceiling contracting firm in Denver reached consensus of their own: It’s time to get real about stimulus programs. Tax credits have not done much good for wall-and-ceiling contractors.




“To my knowledge, [the stimulus package] is not helping our type of construction,” says Bruce Miller, president, Denver Drywall Company, Englewood, Colo. “I’m not advocating that we take anything away from the heavy-and-highway infrastructure that needs to be replaced, but we’re certainly not getting much action.”




Fiscal stimulus programs and other recent government initiatives are reforming, regulating and legislating commerce top to bottom. Just when business conditions in the wall-and-ceiling industry couldn’t be worse, a slate of new laws, mandates and credits, plus financial and health-care reform, have hit the industry all at once. While the fate of future spending remains to be seen, one thing is clear: The rules for doing business have changed.




“There goes the business model,” says Mike Poellinger, president of Poellinger, Inc., La Crosse, Wis.




Health-Care Reform


As prescribed by the Patient Protection and Affordable Care Act, signed into law in March, certain employers with more than 50 employees will pay a health insurance “fee” beginning in 2014. Depending on your employees’ circumstances, these fees will run $2,000 per employee—in some cases $3,000—for the number of employees in excess of 30.




“Somebody has to cover all those people who were uninsured for so long,” says Jeffrey Burley, president and CEO of B & B Interior Systems, Inc., Fort Lauderdale, Fla., who currently employs 30 to 40 workers. “There is the perception in this administration that everybody in business is making money, so why not assess them?”




The Small Business Administration says the new law will provide $40 billion in relief for small businesses via tax credits. The National Federation of Independent Business, on the other hand, believes the law will dramatically raise business costs and add burdensome paperwork, and points out that tax credits are only temporary.




Worrisome is Massachusetts. Four years after the state passed a heath-care overhaul similar to the recently enacted national plan, “small businesses are seeing their premiums rise 22 percent this year,” reports The Wall Street Journal.




“It’s obviously going to cost us money,” Burley says.




Miller agrees. Health-care reform will raise his company’s cost of doing business. Denver Drywall provides health insurance for its employees, but recently had to switch from covering 100 percent to only 75 percent of the premiums.




“It’s a sign of the times,” says Miller, who employs 190 individuals, but once had 500 on the payroll.




Requirements for health care, and some restrictions, generally involve companies with 50 or more employees. Fewer than 50, and a business may be considered “disadvantaged.” But this raises questions:




• What about seasonal employment averages? Is 50 a threshold? Or, can a wall-and-ceiling contractor surpass 50 so long as he employs 49 persons on average throughout the year? “Nobody can tell you,” Poellinger says. “We haven’t been able to get an answer from our legislators.”




• What about union shops? “Our company’s CPA can’t figure out the ramifications,” says Poellinger, whose company is unionized. “Union [health insurance] packages are more or less considered better packages, and this law generates money using higher-end plans. So, some union plans may fall into these categories.”




The Patient Protection and Affordable Care Act offers incentives. Specifically, businesses employing fewer than 25 people can receive a tax credit. But, the credits can be marginal. Using an NFIB online calculator (nfib.com/object/calculator.aspx), a firm with 24 employees, each earning $25,000 annually, contributing $3,000 per employee in annual health insurance premiums, receives a credit of only $70 per employee. The $1,680 total credit helps offset total employer premium contributions of $72,000. Hire a 25th employee, and the credit disappears. Give those 24 employees a $2,000 raise, and again the credit disappears. Give them a $1,999 raise, and the credit stays but drops to $28 per employee.




Rather than get caught up in details their human resources managers will eventually sort through, many owners focus on improving their operations.




“I have to admit that I’m handling the fires that are burning the brightest,” Burley says. “This fire [health-care reform] is smoldering in the background.”




Financial Reform


In June, the House and Senate agreed to comprehensive financial reform. With a plethora of new banking regulations, wall-and-ceiling firms may find their credit worthiness undermined by banker paranoia over the new federal examination process and penalties associated with non-compliance.




While legislators intend on pressuring banks to lend money to projects and extend lines of credit to companies, many drywall contractors see the opposite taking place.




Denver Drywall has a line of credit and pays the service fee to maintain it. Miller says the company hasn’t used the line of credit for four years. Yet, it was the main topic when the bankers recently came to his office.




“Why are you paying money for this line of credit?” the bankers asked.




“Because I’m going to need it one day,” Miller replied.




“But, you haven’t used it for years.”




Miller knew something was amiss. Why would bankers getting paid worry over a line of credit’s non-use?




“We’d like to buy you lunch,” they said.




At lunch, the bankers revealed they’d be cutting Denver Drywall’s line of credit. “To be in compliance with the bank examiners,” was the reason they gave. Miller saw it coming.




The story illustrates how some factors outside our industry often now drive it. More bankers, Miller believes, will emphasize regulation compliance over credit reviews. While interest rates are low, and many projects are ready for bid, banks seem bent on shirking developers.




“Even owners with good financial feet struggle to get loans,” Miller says.




Hiring Incentives


Details of hiring tax cuts are out. The Hiring Incentives to Restore Employment (HIRE) Act, signed into law by the president in March, offers a payroll exemption and, in addition, a new-hire credit.




For contractors with work, hiring new employees and rehiring laid-off workers is worth looking into—but much depends on the state.




“Some states, for instance Iowa, offer incentives for new hires, but they have to be somebody that has never worked for the company,” Poellinger says. “You have to go in and preregister where you are today with your employment and then, going forward, everyone you hire may give you a $1,000 tax credit.”




But, a curious thing is also happening in the marketplace. Rather than hire back employees to take advantage of credits, some contractors, asserts Miller, are creating their own kind of credit by rehiring former employees, but reclassifying them.




“They hire them back, but classify them as ‘independent contractors,’” Miller says. “Consequently, they don’t carry workers’ comp. They don’t pay payroll taxes or insurance on those guys.”




“They can bid better,” he adds.




Some stimulus programs can even place hurdles before firms. This is true in markets where Veteran’s Administration projects are under way.




“Most small projects for the VA in our marketplace, where we used to do a fair amount of work, are limited to contractors who have a disabled veteran certification,” Poellinger says. “Contractors from California, Oklahoma and other places are coming in to bid.




A New Corporate Order


In Wisconsin, a few years ago, some companies formed separate companies and transferred their trucks and equipment to them. The new company owned the equipment, which the parent company would rent. It was a mechanism for expensing equipment, limiting liability, parsing out profits among multiple firms and keeping tax bills small.




“There is a move to do that again,” Poellinger says.




Though Wisconsin has since made equipment rental fees taxable, new corporate and individual tax rates, kicking in on Jan. 1, 2011, are bringing the idea of tax sheltering back to the fore.




“You might see companies with multiple offices breaking those offices up and making each its own business,” Poellinger says. “You’re not so large and can look at tax advantages for two businesses instead of one.”




Even long-standing company structures are under the microscope. LLCs and S corporations, Poellinger says, may no longer be so advantageous.




“It’s going to go back to the 1970s where companies would be looking at CPA firms that can create tax shelters,” Poellinger says. “I think you’ll see new start-up construction companies looking to stay small, under 50 employees, and using a cash basis instead of an accrual basis to massage their income at the end of the year.”




Denver Drywall’s Executive Planning Committee meets monthly. It, too, is looking at change. “Our CPAs are reviewing our corporate structure as we speak,” Miller says.




“We’ve got to find a way to get rid of risk,” Miller says. “We’re starting to see some jobs where lenders require ‘liquidated damages’—they fine you, say, $40,000 a day for every day you’re past a completion date. It’s just not fair.”




Poellinger believes the new world order simply calls for being nimble.




“If it becomes a disadvantage for a contractor to have 60 employees, and he’s in a market where he’s never going to get back to 200 employees, then obviously he’s going to sub-contract work to limit his employee count,” he says. “I see these programs creating a downsizing situation for business.”




That is, instead of employing 60, you remain content to keep 40 on the payroll. And, how can a firm do $10 million worth of annual wall-and-ceiling work with only 40 on staff?




“You sub out a portion of the work to another contractor,” Poellinger says. “Or, you start another company and sub out to it.”




It’s a new world order indeed.




Mark L. Johnson is an industry writer and marketing communications consultant.

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