Construction Today - November 2017 - 99
IN THIS SECTION
Expenses are deductible when the contractor becomes liable for the
expense, the amount can be determined and economic performance
There are several methods of accounting for long-term contracts.
Contractors should base their selection on three criteria.
First, do you have contracts that are short-term or long-term? The
IRS considers any contract spanning more than one tax year to be longterm. For example, a contract started on Dec. 1, 2017 and not completed
until Jan. 25, 2018 is considered a long-term contract.
Second, are you a homebuilder or a general construction contractor? Home construction contracts are ones where 80 percent or
more of the total contract costs are on buildings that have four or
fewer units. All other long-term contracts are considered general
Third, are you a small or large contractor? Your company is considered a small contractor if the annual average gross receipts for the last
three tax years is $10 million or less. Large contractors are required
to use percentage-of-completion for their general construction contracts. Small contractors have more flexibility.
Small contractors must look at their contracts and divide them into
two categories: contracts that will likely be completed within two
years and ones that are estimated to take two years or longer to complete. For the longer contracts, small contractors are required to use
the large contractor method, percentage-of-completion, even though
they are a small contractor.
Small contractors with contracts not exceeding two years must either use the cash, accrual, completed contract or percentage-of-completion method for all general construction contracts.
Completed contract method reports all income and job costs when
the project is considered complete. General and administrative costs
are deducted under the accrual method. Since income is deferred
under this method until the contract is complete, the contractor has
some control over contract completion. The IRS deems a contract
complete when the earlier of at least 95 percent of total allocable
contract costs have been incurred, or upon final completion and
acceptance of the job.
Percentage-of-completion method reports income as the job progresses. Income is calculated by comparing allocable contract costs
incurred to total estimated allocable contract costs. Allocable contract
costs include direct and indirect costs along with retainage. Change
orders are also included in the percentage-of-completion method.
Wouldn't it be nice to exclude retention payments from costs incurred to date when calculating percent complete on a contract? Large
contractors who are required to use the percentage-of-completion
method of accounting may want to consider changing their accrual
Knutson Construction- The Nexus
Knutson is adding housing to Des Moines, Iowa.
Walsh is building an
eye-popping addition to
Chicago's South Loop.
100 Power Design Inc.
102 Hudson Meridian
106 KCG Development
108 II BY IV DESIGN
112 Piroli Group Developments - Seacliff Heights
114 Camden Development
116 Knutson Construction-
The Nexus at Gray's
119 Walsh Construction
122 Stoneleigh Construction
method to include deferral of retentions. This
method excludes retention amounts until the
retention is payable to the subcontractor.
Another option available to those contractors using percentage-of-completion method
of accounting is the ability to defer recognition
of gross profit under a long-term contract if
less than 10 percent of the total estimated contract costs have been incurred. This threshold
is usually exceeded in the subsequent year.
Many accounting methods require a
change in accounting method file with the
Internal Revenue Service. Consult your tax
advisor for the most advantageous method
for your company.
Jennifer French is a partner in PBMares, a Williamsburg, Va.-based accounting
and business consulting firm. She can be reached at email@example.com.
NOVEMBER 2017 CONSTRUCTION-TODAY.COM