Be prepared for the tax season

Tax man

In this article, we’ll cover the several tools available to construction contractors to defer income tax liabilities. There are significant differences between financial POC and tax POC (and the related exemptions) that can result in large tax deferrals. One of the significant differences between financial POC and tax POC is the capitalization of indirect costs.

Those who understand and take advantage of deferral opportunities can push a substantial amount of income tax to future tax years. In the alternative, if the wrong method is selected, it could result in paying too much too soon. A contract is considered long-term if the contract’s term spans over more than one tax year.

Cash method can be an overall method of accounting for all revenue and expenses. Under this method, revenue is recognized when cash is received and expenses are deducted when paid. Expenses are deducted when the all-events test has occurred but not before economic performance has occurred. Revenue and costs incurred on a contract are not recognized until the contract is complete and accepted. This method may be elected by contractors whose contracts are exempt from POC under Code section 460 (using the cost-to-cost method).

Contracts that are exempt from POC under IRC Section 460 give the contractor an opportunity to defer income taxes by using a more favorable accounting method.

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