Construction Tax Methods: Hartford Construction Accountants CPA

HARTFORD CONSTRUCTION ACCOUNTANTS CPA
William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor, Sage Master Builder Consultant
Accounting for Construction Contracts: Tax Methods
46 Mildrum Road, Berlin, Connecticut Telephone: (860) 828-3269 info@cpa-connecticut.com

Hartford Construction Accountants CPA: William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor, Sage Master Builder Consultant urges all new contractors to set up the "correct" tax method of accounting for their business upon filing their initial tax return. If you desire to change your current method of accounting, please contact us.

Most contractors use two different tax accounting methods:

One method for their long-term contracts
An overall method for everything else

There are two primary overall tax methods of accounting for contractors (see cash method limitations below):

Cash Method: income recognized upon constructive receipt of cash.
Accrual Method: income recognized when earned.

Adding to the complexity of tax accounting methodologies for contractors is the fact there are several different accrual and long-term contract methods available to certain contractors.

The Cash Method of Accounting for Contractors

Section 448 of the Internal Revenue Code prohibits the use of the cash method by contractors organized as a C corporation and those as a partnership with a C corporation partner, unless the C corporation or partnership with a C corporation partner meets a $5,000,000 gross receipts test. In addition, Section 448 also prohibits tax shelters from using the cash method of accounting. Except for these contractors, Revenue Ruling 2002-28, issued in 2002, allows "qualifying contractors" (i.e., those with gross receipts of up to $10 million dollars) to use the cash method of accounting and to treat inventoriable items as nonincidental materials and supplies.

Qualifying contractors may elect the cash basis of accounting both as its overall tax method of accounting and as its method of accounting for long-term contracts, or they may choose the completed-contract method as its method of accounting for long-term contracts, allowing deferral of any income until the completion of the contract.

The Accrual Method of Accounting for Contractors

Contractors unable to use the cash method of accounting must utilize the accrual method of accounting for contractors as its overall tax method of accounting. The tax method available for the long-term contracts generally is contingent upon the revenues of the contractor.

Contractors having average annual gross receipts exceeding $10 million generally are required to use the percentage-of-completion method of accounting, wherein income is recognized annually according to the percentage of the contract completed in that year.

Contractors having average annual gross receipts of $10 million or less in general may use the completed-contract method for their long-term contracts and the accrual method for all other contracts.

Under normal circumstances, small contractors ordinarily would achieve the maximum deferral of income taxes by selecting the cash method as its overall method of tax accounting and the completed-contract method as its long-term contracts method of tax accounting. Consequently, it is important to designate these two methods on a small contractor's initial tax return as the elected methods of tax accounting for its overall and long-term contracts in order to avoid any potential problems with the Internal Revenue Service.

If you have any questions regarding your elected tax accounting methodologies, or on the implementation of these methods, please call us at (860) 828-3269 or contact us: Hartford Construction Accountants CPA. We would be pleased to arrange a free initial consultation to address your concerns.

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