2018 Contractor Method Changes

by Kate Fluker, CPA

What if I told you that you didn’t have to pay tax on your revenues until you actually got paid? Or that you could wait to pay tax on your contracts until your contracts were completed? Sound too good to be true? Well, if you are a small construction contractor with under $25 million of revenues, it may not be.

The new Tax Cuts and Jobs Act of 2017 (TCJA) has brought a lot of changes, from a reduced corporate tax rate to the creation of the new qualified business income deduction. One change that hasn’t been talked about as much but could potentially have a large impact on your business is the change to the simplified accounting method requirements.

Prior to 2018, small businesses with average annual gross receipts for the three previous years of $10 million ($5 million if a C Corporation) or less were eligible to use the cash method of accounting for tax purposes. Under the TCJA, that threshold has been raised to $25 million for all taxpayers. This means that taxpayers with average gross receipts between $10 million and $25 million have the opportunity to elect to use the cash basis of accounting for tax purposes.

Small construction contractors with average gross receipts between $10 and $25 million have an additional tax planning opportunity. Prior to 2018, contractors with average gross receipts over $10 million were required to use the percentage of completion method for their long-term contracts. However, that threshold has also been increased to $25 million, opening the door for small construction contractors to elect to use other, more favorable, long-term contract methods for tax purposes. Two of these more favorable methods are cash and completed contract. Under the cash method, taxes are paid on income when payment is received. Under the completed contract method, taxes are paid on revenues only when the contract is complete.

If you want to learn more about these tax planning opportunities or are unsure as to how to proceed, please contact your BMSS professional. They can help determine which opportunities you may want to consider and can tailor an individual plan of action that is suited to you and your business.