Choosing the Most Appropriate Construction
Accounting Tax Method
On too many occasions, I have witnessed construction companies not
using the most appropriate accounting tax method in order to defer
their tax liabilities and enhance their cash flows. Every year
many construction companies fail, not because their operations are not
profitable but due to a lack of sufficient cash flows. Choosing
the most appropriate construction accounting tax method may have
prevented the failure and bankruptcy of some of these construction
For a small or medium sized contractor with revenues of less than $10
million annually, I typically recommend choosing two tax methods of
accounting: for its overall method of accounting, I prefer the
cash method of accounting; and for its long-term contracts, the
completed-contract method of accounting.
With the cash method of accounting as its overall method of accounting,
the ability of a construction company to meet its tax obligations is
enhanced since the lead time in receiving payments after requisitions
have been submitted can extend often to 120 days, if not longer.
And with retainages being withheld, unless outside financing is
secured, contractors can find themselves in arreas in paying their tax
liabilities as well as in paying other day-to-day expenses.
Deferring tax liabilities until payments are received by the
contracting firm can mean the difference of remaining in business or
closing a company's doors.
Choosing the completed-contract method of accounting for long-term
construction contracts is imperative for all contractors. Under
this method of tax accounting, contractors are able to defer taxes on
all profits of uncompleted contracts until they are completed.
Once again, this may involve millions of dollars of tax income deferred
until later years when cash flows are sufficient.
The sad reality is that rarely have I seen these two methods selected
together on a contractor's tax return.
If you are a contractor and have doubts about your present accountant's
understanding of construction accounting and construction tax methods,
please consider using our firm as your construction tax and accounting
Have a tax or an accounting question? Please feel free to submit
it to William Brighenti,
Accountant, Hartford CPA Accountants. For information
and assistance on
any tax and accounting issue, please visit our website: Accountants CPA
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tax advice based on their particular circumstances from an independent