The State has retired the law suspending subcontractor’s deduction starting July 1, 2013. What that means is contractors that fit a certain criteria can claim GET deductions on a portion of their revenues. Here’s a quick guide on what subcontractor’s deduction mean and how to know if you quality.

Not all businesses and contractor projects qualify for deduction. You must meet the criteria mandated by the Department of Taxation and those are:

1. You are a person who erects, constructs, repairs or improves buildings and other structures.  These are projects on properties attached to land or other real property.
2. You must be engaged in Architecture, Professional Engineering, Land Surveying, Landscape Architecture and Pest Control or Fumigation.
3. You hired a subcontractor to fulfill a portion of the contract who likewise falls under the definition in the first two items above.
4. Both the contractor and subcontractor must have a General Excise Tax (GET) License.

In addition, any party can claim a deduction as long as they are considered a Specialty Contractor licensed by the Department of Commerce and Consumer Affairs (DCCA). Exceptions to the DCCA rule are Specialty Contractors with projects that are exclusively on federal military installations. The latter contractors do not have to be licensed by the DCCA.

If you meet those conditions, then do you qualify immediately? Not necessarily. Below are a few scenarios to illustrate the eligibility for the subcontractor deduction.

Scenario 1:

Contractor A has a contract with Client C for $100,000 to construct Client C’s office. 30% of the contract amount ($30,000) is paid to subcontractor B to install the electrical and plumbing systems. In this case, B is a subcontractor of A. Now, does contractor A compute GET based on the entire amount of $100,000? No, contractor A only computes GET on his fees, which is $70,000, or 70% of the full contract amount.

Scenario 2:

Contractor A has a contract with Client C for $50,000. 80% of the contract amount ($40,000) will be used to purchase furniture from Vendor B. Can A claim a deduction of $40,000 on his gross income? No, purchase of furniture isn’t considered an improvement of existing real property and is not considered a deduction.

Those are just few examples and we hope we helped you understand what the subcontractor’s deduction is all about. If you need help on your GET or how to compute subcontractor’s deduction, then please call us at (808) 930 5555 or email us [email protected].

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