New Rules Benefit Contractors and Retailers

By Ben Kinsey, CPA

Calling all small contractors!  

Image courtesy of flickr

I have good news for contractors concerning long term construction contracts.  The 2017 Tax Act can save you money and reduce your accounting hassles. As long as your business does less than $25 million in gross receipts and the contract duration is over a year in length, you will be able to use cash accounting as opposed to the percentage of completion method you are currently forced to embrace.  In the past, long term construction contracts had to be reported using the percentage of completion method.  This method was very cumbersome to employ, since it required the contractor to even out the reporting of income over the life of the contract, regardless of the income collected. To use this method, all contractors were required to keep detailed accounting records of each period during the contract.

The new rules for long term contracts started after December 31, 2017, can now be accounted for using the cash accrual basis instead of percentage of completion as long as your business reports under $25 million in gross receipts. The only downside is you will have to keep using the percentage of completion method for any long-term contracts started prior to January 1, 2018 that are still in effect.  This means you will be forced to ease your way into the cash accrual method of accounting for 2018. That’s the bad news.  The good news is come 2019, all your accounting headaches concerning percentage of completion reporting will go away.

What this means over the long haul is this new ruling is going to ease some of the complications for small contractors when it comes to filing tax returns.  That’s not to say your bonding company isn’t going to require you to keep some sort of percentage of completion records to keep them happy.   That’s a separate issue.  In addition, some of the capitalization rules have been eased, including cost capitalization, and inventory.  

Changing Retail Rules

Image courtesy of Foursquare

If you are a retailer that grosses less than $25 million, the rules for inventory accounting have changed.   The new rules provide you with the choice of getting rid of your inventory altogether.  This is a good thing for tax purposes, because if that $1 million in inventory suddenly went to zero, you probably wouldn’t have any income to report this year. To make it legal though, you have to do this correctly:

      1.      You have to make a filing.

      2.      You have to make an election.

When performed properly, not only will this be a good move from a taxation point of view, it could also be a good cash-flow move for you and your business.  If you had a great year this year, you can expense your inventory in the future.  This is a great way for small retailers to help level the playing field a bit when it comes to competing with the big boys.  Especially now that Amazon and Walmart have entered the online marketing realm with local pickup, this could be a godsend for retailers trying to defend their niche and pay down some debts while saving on taxes at the same time.

Just as with contractors, if you want to take advantage of the new tax rules, you will be required to change to a cash accrual method of accounting if the production, purchase or sale of merchandise is a profit-producing factor for your business.  Additionally, the 2017 Tax Act allows retailers to expense improvements to their business including roofs, HVAC, security and alarm systems, provided the business is not run from your home.  The Act also allows retailers to expense 100% for select business machinery, as opposed to the 50% previously allowed by law.

The downside is that these deductions will only be in effect as currently stated until December 31, 2022.  After that, a planned phase-out for property purchased in 2023 onward, as well as other planned reductions on select deductions beginning in 2026 mean the time is sooner rather than later to take advantage of these IRS benefits while they last.

Ben Kinsey, CPA of Small Business Group works with owners of closely held corporations in the Northeast Florida region.  If you work in the North Florida area we offer a FREE initial Consultation at our office, please contact Small Business Group if you would like to know more about strategies for your business.

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