Tax Cuts and Jobs Act Impacts Businesses and Individuals
Topics: Tax Planning
One of the topics talked about all year is how our tax system needs to be greatly improved and just this week, President Trump and Republican Leaders released how they think it could be fixed.
Topics: Tax Planning
If you are a construction contractor reporting long-term contracts on the percentage of completion method (§460(b)(1)) you may be required to calculate look-back interest (§460(b)(2)) on your long term contracts.
The tax reporting options for long term construction contracts can be perplexing. The rules are complex, sometimes counter-intuitive, and a bad decision or poor advice can lead to some negative tax consequences.
First off, what is a long term contract? A long term construction contract is any contract written for the purpose of manufacturing, building, installing, or constructing a property that spans more than one tax year. In other words, if a calendar-year taxpayer begins a construction job on December 31st and finishes it on January 1st, the contract would be deemed "long-term" since it spans two tax years.
Percentage of Completion Option
Long-term contracts are subject to the percentage of completion method for reporting taxable income (IRC Section 460(b)(1)); however, there are exceptions discussed later. Percentage completion is a method of allocating the taxable income generated from a contract based on how much of the work has been completed. Generally, the overall cost of the contract is used as the basis for allocation. For example, if a contract is estimated to generate $30,000 in income and will cost $75,000 to complete, when $50,000 or 2/3 of the total contract costs have been incurred, $20,000 or 2/3 of the estimated contract net income would be recognized.
If you’re like many Americans, you may not start thinking about filing your tax return until the April 15 deadline (this year, April 18) is just a few weeks — or perhaps even just a few days — away. But there’s another date you should keep in mind: January 19. That’s the date the IRS began accepting 2015 returns, and filing as close to that date as possible could protect you from tax identity theft.