Make Sure the Tax Methods of Accounting You Use are Appropriate for Your Situation

June 9, 2014|Jamie Brown

The construction industry is one of the most difficult industries to understand from a tax perspective due to the many different methods of accounting available. Not only do construction contractors have a general method of accounting (cash, accrual, or a hybrid method), they also have an accounting method for long-term contracts (generally, a contract that is not completed within the taxable year the contract is entered into). Long-term contract accounting methods include the completed contract method and a variety of percentage of completion methods. Furthermore, eligibility for the different methods of accounting depends on many factors including entity type, amount of revenues, and types of contracts.

While the varying types of accounting methods add complexity, they also add opportunity. The methods of accounting used influence the tax position of a contractor for many years into the future.

Each method has its own benefits and disadvantages, which you should analyze before your initial election and continue to monitor as your company evolves and the tax environment changes. In certain situations you can change your accounting method if your current method is not the most beneficial for your situation. 

 Why should you review accounting methods?  Your method of accounting influences your tax position for many years into the future.
 When should you analyze the benefits and disadvantages of each method? • When you initially elect a method
• As your company evolves
• As the tax environment changes
 When should you consider changing accounting method? If what you use now is not the most beneficial for your situation.
 What determines your eligibility for a particular accounting method? • Your entity
• Your revenue
• Your contracts

Please contact your account director or any member of our Real Estate and Construction Team if you have any questions regarding your accounting methods.

Jamie Brown, CPA, is an experienced tax advisor to closely-held businesses and their owners, providing tax research, proactive planning and compliance. His background includes serving as the controller for a commercial real estate company for three years. He draws on this real-world experience to meet the needs of clients in the real estate and construction industries.