A few years ago, many contractors’ backlogs were significantly reduced as a result of shrinking demand and increased competition. Volumes decreased significantly, leading to cost cutting and size reductions in order to survive. For the little work that was still out there, profit margins were thin due to increased competition during the bidding process. Also, stricter banking regulations made it difficult to obtain working capital loans to help bridge the gap to finance projects.
A lot has changed since then. Although some uncertainty still exists, there are positive signs of an improving economy and housing market. The stock market has rebounded and is riding an all-time high. Many construction backlogs look promising once again as more projects enter the pipeline. Company profits are on the upswing.
However, these increased profits come at a time when individual federal and state tax rates can be as high as 45 percent. Now is the time to take a fresh look at the various accounting methods available for tax reporting purposes to help minimize your tax burden and improve cash flow. The timing is critical. As your volume continues to grow, so could your tax deferral from other accounting methods.
Contractors that have diversified themselves with housing, dormitory, and condo projects have the greatest chance of deferral via these available accounting methods. Also, contractors that have seen their volume increase year over year have an advantage because they are able to defer the recognition of income on contracts that are less than 10 percent complete at the end of each year.
At a minimum, you should review your current WIP and backlog schedule to understand the type of contracts you will be incurring. Then, compare your current tax accounting method for reporting these contracts to these other available methods to determine which provides the greatest deferral for reporting taxable income.
By taking advantage of these opportunities you can not only lower your tax cost each year, but also enhance your competitive edge. Plus, you will have more funds to be reinvested into the company for future growth in infrastructure and capital asset purchases.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.