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Health & Fitness

Is your construction company using the right tax methods?

I am amazed at the number of contractors who have failed to adopt the most propitious method of tax accounting for their companies.  Sometimes the fault lies with the construction company; however, more often than not, the fault lies with the tax return preparer who lacks the necessary expertise in construction accounting.

Yes, it's true, that most contractors having revenues of less than $1 million annually are on the cash method.  But many are unaware of their eligibility to continue using the cash method as long as their revenues do not exceed on average $10 million annually.  Why incur tax liabilities before you, the contractor, has received payment for your construction project?  Such reckless cash planning has resulted in many profitable companies going out of business and filing bankruptcy.

What is equally egregious is the number of contractors who have failed to select a method of accounting for their long-term construction contracts. The Internal Revenue Service does not restrict companies from adopting more than one method of accounting, and accepts different methodology for long-term contracts.  Under the completed contract method, there is no tax liability resulting on profits earned on uncompleted projects.  If your tax preparer has not selected the completed-contract method for you, and your average annual revenues are less than $10 million, you might want to consider obtaining a second opinion from a Certified Public Accountant having an expertise in construction accounting.

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When cash flow is as important as profitably in these very challenging times for contractors, it is imperative that contractors elect the appropriate methods for its tax accounting, particularly one that maximizes the deferral of its tax liabilities.

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