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Construction Industry - Compliance
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This entire site is for educational or informational purposes only. You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional. The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas. At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed. Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply. In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida. Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. .......
Thursday, February 22, 2007 11:44 AM
Contractors – Woes of
Compliance
I am writing to follow up on our recent
conversation regarding the treatment of long-term contracts for federal income
tax purposes. Generally, income, deductions, and other items arising from
long-term contracts must be accounted for under the percentage of completion
method.
A "long-term contract" is a
building, installation, construction, or manufacturing contract that is not
completed in the same taxable year in which it is entered into. For example, a
construction contract entered into in October, but not completed until the
following March, is a long-term contract. In addition, manufacturing contracts
must either be for unique items (not usually carried in finished goods
inventory) or for items which normally require more than 12 months to complete.
Under the percentage of completion method, a
taxpayer determines the amount of income to be recognized in a taxable year by
using a two-step process. First, the taxpayer multiplies the total amount of
revenue that the taxpayer expects to receive from the contract by the cumulative
percentage of the contract that has been completed by year end. Second, the
taxpayer subtracts from this result the amount of contract revenue included in
income in all preceding years. The cumulative percentage of the contract that
has been completed is equal to the ratio of: (1) the cumulative costs allocable
to the contract incurred in the current, and all preceding, taxable years; to
(2) the total expected costs allocable to the contract.
Costs allocable to the contract are
deductible in the year incurred, regardless of the taxpayer's overall method of
accounting. For this purposes, an item is incurred when it would be incurred
under the accrual method of accounting.
Because the percentage of completion method
requires the use of estimated contract revenue and costs, a
"look-back" provision applies. The look-back provision provides that,
upon completion of a contract, the taxpayer computes the income that would have
been reported in each year had the actual contract revenue and costs been used.
If this results in an understatement of income, the taxpayer owes interest on
the tax underpayments computed from the underpayment years until the year the
contract is completed. Conversely, if the computation results in an overpayment
of tax, the taxpayer is due interest on such overpayment.
Construction contracts of small
contractors and home construction contracts are exempted from the requirement
that the percentage of completion method be used. A small contractor is one
whose average gross receipts for the preceding three years does not exceed
$10,000,000. A contract is a home construction contract if 80% of the contract
costs are expected to be attributable to the building, construction,
reconstruction, rehabilitation or improvement of dwelling units in a building
that has four or fewer units. In addition, special rules apply to residential
construction contracts (i.e., contracts that meet the definition of a home
construction contract without the requirement that the building contain four or
fewer units).
I hope you will find this general information
useful. If you have a specific situation you would like to discuss, please call
me.
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§§§ Law §§§
§274(d)
§§§ Regs §§§
§§§ Cases §§§
This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth.
Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.
This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.
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