Construction Accounting Tips
How you keep track of construction expenses and progress can make a huge difference in the taxes you pay to the IRS. The best way for you to pay the least income taxes is the Completed Contract Method.
With this method, all income and expenses (both direct and indirect) are deferred until the year the contract is completed. This way is preferred by most builders.
To use the Completed Contract Method:
- You must be a “home construction contractor”.
- You must be a “small contractor”.Which means:
- Contracts must be completed within a 2 year period.
- Your average revenue is less then $10 million per year (using past 3 year history).
These rules are per Internal Revenue Code, Section 460.
Who Owns the Land?
How much income tax you pay will also depend upon who owns the land.
If, you build a house on land you own, the IRS rules are:
Upon the sale of the house, the costs capitalized will be used against the house sales price to determine the gain or loss from the sale. Including the land cost, construction and erection of the house. (Per IRS Revenue Procedure 2002-28 Section 6)
If, you build a house on customer owned land, the IRS rules are:
Builder deducts expenses the year materials are used to build the house.
Advanced Payments
You can defer any “advance payments” for work until the next year, ONLY IF the work is to be performed within the next 12 months. (per IRS Revenue Procedure 71-21).
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