Here at Camuso CPA, we offer a wide array of tax and accounting services for construction and trades businesses including tax preparation, tax planning, accounting, controller and CFO services. If you are interested in how this might specifically benefit your business, please don’t hesitate to reach out in detail today to schedule a free initial consultation regarding your specific facts and circumstances.
One of the most comprehensive changes included in the recent tax law changes are the changes in tax accounting methods available for contractors.
Accounting methods previously available to contractors under certain revenue thresholds, mainly $10 million in revenue, are now available to contractors with average annual gross receipts of up to $25 million.
We go over the applicability of these changes in more detail below.
These rules now consider the average gross revenue of the three-year period preceding the currently taxable year rather than just considering any previous taxable year independently.
Since choice in accounting methods impacts the timing of when income or deductions are reported it is a revenue neutral decision.
Nevertheless, the timing changes can result in significant deferral of tax liabilities which can benefit your business from a cash flow perspective.
Some amount of deferral or increasing deferrals can result in permanent or at least long‐term tax savings to companies depending on multiple factors including yearly effective tax rates.
One of the most important decisions you will make for your construction or trades business is the choice of accounting method since this will drive both tax and accounting considerations when managing your company.
This decision should be based on the current and reasonably possible future activities, opportunities, risks and performance of the business.
Business owners should also consider the actual and potential liabilities of the enterprise; as well as various income, estate, employment, and other tax considerations.
A contractor’s tax return can have more than one method of reporting based on the business activities.
Generally, we see construction businesses use at least two accounting methods. One method is utilized for short term contracts completed within a tax year which is considered your overall method while a separate method is often used for long term contracts which are completed over multiple tax years.
The considerations below are regarding tax reporting methods.
Maintaining your accounting records for business decision making purposes may require a separate accounting method in certain circumstances.
The cash method of accounting is generally permissible rather than the accrual method as an overall accounting method for companies with receipts for less than $25 million in revenue.
Before the tax law changes, construction businesses with revenue over $10 million were required to use the percentage of completion method for long-term contracts. This exception has now been expanded to $25 million and allows companies to use other permissible accounting methods such as the completed contract method.
These new accounting method options are not always the right fit for your company, and it is imperative to accurately determine which is the most tax beneficial for your business before making any changes.
Generally, if your accrued income is higher than your accrued expenses then changing to the cash method can prove to be beneficial in order to defer income. If your accrued income is lower than your accrued expenses, then changing to the cash method may not prove to be beneficial from a tax perspective.
Other considerations here is the expected future performance of your business along with the anticipated future marginal tax rates.
Consider AMT Tax
If you determine that thiis may be advantageous to change your accounting method from the percentage-of-completion method to the completed contract method it is imperative to consider that you’re required to calculate income based on percentage of completion for purposes of the alternative minimum tax.
Keep in mind that the Tax Cuts and Jobs Act repealed the corporate AMT and substantially increased AMT exemption amounts for individuals.
Changing Accounting Methods
IRS revenue procedures issued in 2018 provide that most of the allowable changes will be considered automatic. These changes will still require taxpayers to file form 3115 but with significantly less documentation requirements, no requirement for IRS preapproval and no user fees.
Changes in the overall method of accounting are made through a section 481 adjustment which means that the effect of the change is determined at the beginning of the year of change and taken into income over four years if a positive adjustment and deducted in the year of change if negative.
Changes from the percent complete method are made on the cut‐off method so revenues from contracts in progress prior to the year of change will still be accounted for under the old method.
Here at Camuso CPA, we do have the ability to offer planning services for our construction and trades business owners which can assist you with your entity structure and accounting method selection to ensure this is optimized from a tax perspective.
If you are interested into how this might benefit your business, please don’t hesitate to give us a call today. One of our friendly and knowledgeable representatives will be happy to answer any questions you have.