Hartford Construction Accountants of Berlin, Connecticut
William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor
46 Mildrum Road, Berlin, Connecticut 06037
Telephone: (860) 828-3269 Email: [email protected]
Hartford Construction Accountants of Berlin, Connecticut: William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor, located in Berlin, Connecticut, offers accounting services to contractors locally in Hartford, Berlin, Hartford County, New Haven and surrounding areas, as well as remotely throughout the entire United States. Job costing, WIP schedules, and tax methodologies for contractors are some of our areas of expertise. William Brighenti is an expert on Sage Master Builder software for contractors as well as on Quickbooks Contractors Edition.
Tax Information for Small Business - Accounting Methods For Construction Contracts
A set of rules used to determine when and how income and expenses are reported.
Income CASH METHOD: Include all monies actually or constructively received ACCRUAL METHOD: Include amounts when the product or service is provided
Expenses CASH METHOD: Deduct when actually paid ACCRUAL METHOD: Deduct when the expense is incurred
Must Use Accrual Method
• If incorporated or in a partnership with a C corporation and average annual gross receipts exceed $5 million.
• Personal Service corporations and farm businesses can use cash method.
• Tax shelters never can use the cash method. I.R.C. § 448.
When the production, purchase, or sale of merchandise (materials) is deemed to be an income-producing factor (for example, when the cost of such exceeds a minimum percentage of the gross receipts), inventory accounting and the accrual method are required to properly reflect income, even if first requirement does not apply.
Exceptions to Second Requirement for Use of Accrual Method
1. If accrual method is not required by statute, and taxpayer is not in a prohibited class, cash method is allowed when average annual gross receipts are less than $10 million Rev. Proc. 2002-28
2. If taxpayer is in a prohibited class, cash method is allowed if average annual gross receipts are less than $1 million Rev. Proc. 2001-10
Restricted Cash Method
If the cash method is allowed for taxpayers with significant inventories of merchandise or materials due to the Revenue Procedures, the cost of purchases cannot be deducted until the merchandise is sold (“consumed”) or paid for, whichever is later.
Construction contracts (I.R.C. Section 460) The following is a text depiction of a flowchart.
Short Term or Long Term?
• If the contract is short term, then use overall accounting method.
• If the contract is long term, then choose between home contracts, or general contracts
o If the long term contract is a general contract, then choose between small or large contractor
* If the contract is small, then determine if the work can be completed within 2 years.
• If contract can be completed within 2 years, then use Accrual, CCM, PCM, EPCM or Cash (unless accrual required)
• If contract lasts longer than 2 years, then only use PCM.
Short vs. Long-Term Construction Contracts
Short-term contracts start and finish within the same tax year.
Can use cash (unless accrual method required) or accrual method.
Example: If you have a contract that starts on 12/26 and ends on 1/23 of the next year, you have a long term contract.
Homes vs. General Construction Contract
80% of total estimated contract costs are for construction, improvement, or rehabilitation of buildings that have four or fewer residential units.
General Construction Contracts
Definition: Average gross receipts for the last 3 years was greater than $10M.
Large Contractor must use Percentage of Completion
• Cost Comparison Method or
• Simplified Cost Comparison Method (reduced cost allocation requirements)
Definition: Average gross receipts for the last 3 years was $10M or less.
The accounting method depends on whether construction will take more than 2 years.
Small Contractor - Construction over 2 years duration
Use the percentage of completion method PCM) for all construction over 2 years in duration.
Small Contractor - Construction Duration 2 Years or Less
As a small contractor, you can use the
• Cash (unless accrual method required)
• Percentage Completion Method (PCM)
• Exempt-Contract PCM (EPCM)
• Completed Contract Method (CCM)
Exempt – Contract PCM
• Any reasonable comparison of cost incurred to date with estimated total cost
• Comparison of work to date with estimate of total work required
Cost Comparison Method
• Divide job costs incurred through end of year by estimated total job costs.
• Multiply this percentage by contract price to determine Cumulative Gross Receipts (CGR) through end of year.
• Subtract the CGR calculated through preceding year from CGR calculated through current year.
• Difference is Gross Receipts figure for current year.
Example of PCM Cost Comparison Method Based on a Total Contract Price of $1,000,000
Cumulative Costs Year 1 - $200,000 Year 2 - $600,000 Year 3 - $750,000
Estimated Total Costs Year 1 - $800,000 Year 2 - $900,000 Year 3 - $750,000
Completion Factor Year 1 - 25% Year 2 - 67% Year 3 - 100%
Cumulative Gross Receipts (CGR) Year 1 - $250,000 Year 2 - $666,667 Year 3 - $1,000,000
Prior Years CGR Year 1 - 0 Year 2 - ($250,000) Year 3 - ($666,667)
Current Year Gross Receipts Year 1 - $250,000 Year 2 - $416,667 Year 3 - $333,333
Work Comparison Method
• This percentage of work completed must be certified by an architect or engineer.
• Multiply this percentage by contract price for Cumulative Gross Receipts (CGR) through end of current year.
• CGR through current year less CGR through previous years produces Gross Receipts for current year.
• Divide work completed to date by estimated work needed to finish job.
Completed Contract Method
Report all income from the contract and deduct all related job costs in the year the project is completed and accepted by the customer.
Home Construction Contracts
Spec Home Small Contractors - Spec Home Rules Large Contractors - Spec Home Rules
Custom Built Home Small Contractors - Accrual CCM or Cash EPCM (unless accrual required) Large Contractors - Capitalization Rules of IRC Section 263A apply
Homes Built for Speculation (Spec Home Rules): All direct and indirect costs are accumulated. Costs are part of the basis for the property and cannot be deducted until the home is sold.
Custom Built Home: Home built for a specific customer.
Type of Costs
• General and Administrative (G&A) Expenses
• Direct Job Costs
• Indirect Cost Allocation
General and Administrative Expenses
General and administrative expenses are the indirect costs of operating a construction business that cannot be traced to a specific job.
General & administrative expenses are deducted when incurred or paid
Direct Job Costs
Labor, materials, and subcontractor expenses can be traced directly to the construction project.
Indirect Cost Allocation
Indirect job costs involve expenses that benefit more than one job and must be allocated among all the jobs that received the benefit.
Have any questions on accounting methods for construction contracts? Please contact us: Accountants CPA Hartford Connecticut. Thank you.
|William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor, of Accountants CPA Hartford Connecticut has 30 years of accounting and construction experience. For many of those years, Bill worked as a controller for several construction companies as well as directing his own residential construction and development company. From operating his own company and acquiring hands-on experience in estimation, design, cost engineering, job costing, sales, and project management, he developed an understanding and appreciation of the importance of an integrated project management information system, wherein all the different modules of the accounting system are linked and connected, obviating repetitive data entry, minimizing inefficiency, and maximizing the effectiveness of the accounting reporting function. Most small to medium size construction companies fail to fully utilize their construction accounting software, often utilizing Excel spreadsheets for job costing and estimating, and consequently increasing the labor hours for data entry as well as the chance of errors in the accounting system from multiple entries. If you need assistance in implementing and integrating your computerized project management information system, contact William Brighenti, CPA, of Accountants CPA Hartford Connecticut.|
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