TCJA for Contractors
By Sean Larson, CPA
The Tax Cuts & Jobs Act (TCJA) impacted all taxpayers. While many taxpayers took a hard look at the impact of the tax changes when it first came out, many may have not reviewed it since. With year-end just around the corner, this is a good time to review it again and understand how it affects you. In this article, we’ll take a look at the TCJA and how it impacts construction businesses.
For contractors, including general, specialty, and subcontractors, there were some specific provisions that may be of benefit but require careful analysis and implementation. The TCJA generally carved out certain exceptions to long held accounting methods for small taxpayers. Taxpayers with average annual gross receipts under $25 million (indexed for inflation) or less for the prior three tax years are considered small taxpayers under TCJA.
Let’s take a look at a couple of the tax benefits available to a contractor considered a small taxpayer. Know that these methods are for tax only and not to be confused with the new revenue recognition guidance under generally accepted accounting principles (GAAP).
Expansion of the cash method of accounting
The TCJA generally allows all small taxpayers, regardless of corporate structure, to use the cash method as its overall method of accounting. If you’ve been on the accrual method, a review of the potential tax deferral of a change to the cash method may make sense. Note that to apply this provision, you must file an accounting method change (IRS Form 3115) to implement the new method. Keep in mind that for contractors your overall method may be different than your method for long term contracts.
Exemption from IRC Sec. 460 and use of the percentage of completion method (“PCM”)
Many contractors have long utilized the PCM method to account for their long-term contracts (contracts that start in one tax year and end in another). Small taxpayers under the TCJA are now exempt from the requirement to use the PCM method for their long-term contracts. These taxpayers may be able to utilize the completed contract method which generally serves to defer profits on long term contracts. Note that this change generally applies on a contract by contract basis; any contracts started after the change date would be under the new method.
Contractors with large amounts of open jobs at year end may benefit from a significant tax deferral. A careful review of open contracts expected at year end can help determine if an accounting method change is desirable.
Depending upon the taxpayer, you may be able to mix and match the above methods. For example, a contractor could use the overall cash method but remain on PCM for its long-term contracts. A contractor could also implement the completed contract method for its long-term contracts but remain on the accrual basis for its overall method.
A careful review of your situation with your MHCS experts can help you navigate and determine the most appropriate method.
Sean Larson, CPA | Director