More than almost any other industry, construction contractors need to spend time and resources planning for their income taxes before the end of their fiscal year. It is not unusual to find a contractor using up to four different tax methods on a single tax return.
Certain contracts exempt from long-term contract methods can remain on the cash method regardless of the company’s size. Many contractors will be “overbilled” on their jobs, which can cause them to be taxed on amounts that have been billed but not earned for financial statement purposes. These include contracts performed by small contractors (average annual gross receipts less than $10 million per year for the three previous years).
After determining, or electing, the appropriate or allowable tax methods, it is important to project the taxable income for the year. It is essential that losses or lower tax brackets not be wasted due to ownership, basis or participation.
Proper use of these deferrals can result in such significant savings that the regular tax might be substantially lower than the AMT. It is essential that tax planning takes into account any tax liability at the company level, while also considering the tax burden of the pass-through owners.
It is essential that the company’s operations be reviewed prior to year-end while considering the savings available from tax methods, depreciation, related party payments and other tax deductions and credits.
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