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Tips on Accounting in the Construction Industry

Usually, it takes many years of toiling away to build up a fledgling construction business into a profitable operation. Now that your business has finally turned the corner, can you relax? Not on your life. In all likelihood, you will be facing new challenges to keep your business operating in the black.

To further complicate matters, you may be required to fine-tune the accounting methods used for federal income tax purposes. For instance, you can't assume that you will still be entitled to use the cash method of accounting for your construction business—even if you have used that method every year you have been in business.

What should you look out for? The IRS consistently focuses on the following issues as they affect small-business owners in the construction industry.

*The use of a particular accounting method depends on several factors, including the type of business entity, the actual activity, the amount of gross receipts and the existence or lack of merchandise inventory.

*If a business operates as a C corporation and reports gross receipts above $5 million, it is generally required to use the accrual method of accounting.

*If a business must account for inventory such as construction materials as a revenue-producing item, the company generally is required to use the accrual method for purchases and sales.

*Generally, a firm must use the percentage-of-completion method for long-term contracts (i.e., contracts still in process at the end of the year). However, this method doesn't have to be used for home construction projects or other general construction contracts if certain conditions are met. Under these exceptions, your business may be able to use an “exempt contract” method, which combines aspects of various other accounting methods.

This is just the tip of the iceberg. A myriad of other accounting issues may be raised by the IRS in connection with your construction firm. We would be glad to provide the assistance you need to sidestep any potential problems.

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	[ return to list ] Tips on Accounting in the Construction Industry Usually, it takes many years of toiling away to build up a fledgling construction business into a profitable operation. Now that your business has finally turned the corner, can you relax? Not on your life. In all likelihood, you will be facing new challenges to keep your business operating in the black. To further complicate matters, you may be required to fine-tune the accounting methods used for federal income tax purposes. For instance, you can't assume that you will still be entitled to use the cash method of accounting for your construction business—even if you have used that method every year you have been in business. What should you look out for? The IRS consistently focuses on the following issues as they affect small-business owners in the construction industry. The use of a particular accounting method depends on several factors, including the type of business entity, the actual activity, the amount of gross receipts and the existence or lack of merchandise inventory. If a business operates as a C corporation and reports gross receipts above $5 million, it is generally required to use the accrual method of accounting. If a business must account for inventory such as construction materials as a revenue-producing item, the company generally is required to use the accrual method for purchases and sales. Generally, a firm must use the percentage-of-completion method for long-term contracts (i.e., contracts still in process at the end of the year). However, this method doesn't have to be used for home construction projects or other general construction contracts if certain conditions are met. Under these exceptions, your business may be able to use an “exempt contract” method, which combines aspects of various other accounting methods. This is just the tip of the iceberg. A myriad of other accounting issues may be raised by the IRS in connection with your construction firm. We would be glad to provide the assistance you need to sidestep any potential problems. [ return to list ]
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