A contract is considered long-term if it isn’t completed in the same year it’s started, regardless of the time you take to actually complete the job. For example, the cash method is used for receipts and expenses and the accrual method is used for accounts receivable and payable.Īlong with selecting an overall approach, you must choose an additional a c c o u n t i n g method if you have long-term contracts. Another rarely used approach, this combines the cash and accrual methods. This seldom-used method is similar to the accrual method except that revenue from retainages isn’t recognized until the contractor is entitled to receive it. The accrual-excluding-retentions method.This method can also allow additional tax-planning opportunities through year-end accruals. A major benefit of this method is that it provides a more accurate matching of revenue and expenses as both are recorded when incurred, not necessarily when paid. With this approach, a taxpayer recognizes income and expenses when the underlying service or event occurs, which isn’t necessarily when cash changes hands. Thus, most contractors can’t use it because merchandise includes any item physically incorporated in a product, including all building materials. But a taxpayer may not use the cash method if its total merchandise purchases for the year are substantial compared to its gross receipts. A cash method taxpayer recognizes income when it’s received. The IRS has stated that contractors must select an accounting method that clearly reflects their income. Because no two projects are ever alike, and your earnings may fluctuate from year to year, it’s important to know your options. HBK Construction Solutions can help you ensure you are documenting and job-costing your costs correctly to be certain you can take advantage of these deferrals and evaluate the various available accounting methods to ensure you maximize the cash retained by your business.Construction companies face an imposingly complex choice when it comes to their accounting methods. It will be imperative for contractors not only to document that their PPP expenses were used on allowable costs but also to track them back to the jobs on which they were incurred. Understanding how these costs interact with your method of accounting is paramount to ensuring your company is paying the least amount of tax in the event Congress does not overturn the IRS ruling. However, if these jobs have PPP funded costs that are non-deductible, they should be excluded from the computation, thereby reducing the percentage-of-completion of the job and the amount of revenue to be recognized in the tax year.īoth methods could result in tax deferrals unique to contractors. The percentage of the job costs that have been incurred to date is applied to the total contract price to determine how much revenue must be recognized on that job. All “large” contractors are required to use this method. This method recognizes job profit based on how far a job has progressed at the end of a tax year. If PPP funded compensation and other expenses remain non-deductible, contractors don’t have to concern themselves with that portion of the costs for jobs completed in 2021 until 2021.Ĭontractors can also choose to employ the percentage-of-completion accounting method. While this method can produce an attractive income deferral, in 2020 it comes with a caveat. One such popular method is the completed contract method, which allows contractors to defer reporting profit-revenue and expenses-until the year in which the job is completed. Under IRC Section 460, “small” contractors (under $26 million) have a few options on the accounting method they can use for long-term contracts. To that end, contractors should be aware of accounting issues unique to their industry relating to non-deductible PPP loan forgiveness. While we’re hopeful that comes to pass, we should be prepared if in fact, these amounts remain non-deductible. As PPP loan forgiveness applications are being prepared by companies across the country, Congress is working on a stimulus package rumored to include provisions that reverse the IRS ruling that expenses paid with forgiven PPP funds will not be eligible for a 2020 tax year deduction.
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