#Accounting for contractor expenses series

A “necessary” expense is one that is helpful and appropriate for the construction business.

An “ordinary” expense is one that is common and accepted in the construction business. It is well-established that a construction business can deduct ordinary and necessary business expenses. Note that construction businesses operating as a C corporation, or a partnership with a C corporation as a partner with average annual gross receipts exceeding $5 million, may not be allowed to use the cash accounting method. Contractors who are able to receive money in one year, but chose to defer receipt, must include the cash as income in the earlier year. For this purpose, receipt occurs when a contractor has unrestricted access to income. Cash accounting: As the name implies, cash receipts are reported as income when received and expenses are reported when paid.

With the “percentage of completion method,” income is reported proportionate to the costs incurred to date as compared to total estimated costs for the contract.Ģ.

Under the “completed contract method,” all income and expenses from a contract are reported when the project is completed and accepted by the customer.

The purpose of an accrual method of accounting is to match income and expenses in the correct year.Two commonly used accrual methods are used in the construction industry:

Accrual accounting: This method requires reporting income in the year earned and expenses in the year incurred.

Many construction businesses use two different tax accounting methods: one for long-term contracts and an overall method for all other items, which is often the accrual method. “Either method must clearly reflect a consistent treatment of income and expenses from year to year,” the IRS notes. Generally, income and expenses are calculated using either the cash method or the accrual method of accounting. This applies to individual workers as well as contractors and subcontractors. The IRS emphasizes instances where taxpayers failed to report, or under-reported, income from construction activities. One example is specifically directed at the construction industry.

#Accounting for contractor expenses series

To this end, the IRS has issued a series of documents to provide better understanding of the tax code. The IRS continues to scrutinize the “tax gap” - the amount between taxes that are voluntarily paid and the amount the tax agency believes is actually due.