Article
Benefits for construction companies with less than $25 million in gross receipts
July 28, 2019 · Authored by RL Widmer
Copyright (c) 2019 by the Construction Financial Management Association (CFMA). All rights reserved. This article first appeared in CFMA Bottom Lines and is republished with permission.
Among the many opportunities for small businesses created by tax reform is the expansion and simplification of rules for businesses with less than $25 million in average annual gross receipts. For construction companies, this change in accounting method creates an opportunity to defer income on contracts they likely would have recognized in the past.
Deciphering the implications of this method change is complex. Here’s what construction companies need to know as they assess their method of accounting.
What changed
Prior to tax reform, construction companies with average annual gross receipts over $10 million generally had to use the percentage-of-completion method to recognize revenue on long-term contracts. Additionally, these contractors weren’t able to automatically switch to the cash method. Doing so required an application to change their accounting method under advance consent procedures, making it subject to IRS review and incurring significant user fees. With tax reform, the revenue threshold has now increased to $25 million, and there are some potential method changes to consider.
Overall accounting method
Contractors under the new threshold can switch their overall method from the accrual method to the cash method, which could provide an opportunity to defer revenue, especially if receivables are greater than payables. The benefit of this is the potential to take a “catch-up adjustment”–normally a negative adjustment to income–in one year.
Long-term contract accounting method
Contractors under the new threshold can choose to switch back to their previous exempt method, which could include the cash method, completed contract method, accrual method, or accrual excluding retentions, or elect to move to another permissible method not previously used. Each method offers unique ways to recognize revenue at different times and provide for deferral opportunities. Companies should work with their tax professionals to determine which method to use and any procedural requirements to effect the change.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.