Accountants CPA Hartford
William Brighenti, Certified Public Accountant
Certified Business Valuation Analyst
Certified QuickBooks ProAdvisor
Office Address:  46 Mildrum Road, Berlin, Connecticut 06037-2423      Phone:  (860) 828-3269      Email:
New Britain
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 companies.

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 specialists!

Have a tax or an accounting question?  Please feel free to submit it to William Brighenti, Certified Public Accountant, Hartford CPA Accountants.  For information and assistance on any tax and accounting issue, please visit our website:  Accountants CPA Hartford.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.  The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein.  The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor .
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