The Construction “Net-of-Contract” Methodology

If your accountant/CPA is not using this methodology to manage your construction book of record, then you have the wrong finance team.
Dennis Anderson - Contributor www.Builder-Resources.com
The standard accounting methodology used by most businesses does not work for builders. Profits are not profits until ALL associated WIP and COGS activities have been accounted for and payments satisfied.
Simply stated, if your accountant is taking contract deposits directly into P/L (income), as opposed to Customer Deposits (current liability), your company’s Net Taxable Income is probably substantially higher than it should be.
YOU ARE PAYING TAXES ON FUNDS THAT ARE TO BE USED AGAINST WORK IN PROGRESS COSTS.
Your budgets and forecasts reflect a profit, but your gut tells you that the profit should be much higher. Where is the break??? - You are using the wrong accounting methodology.
Most accounting programs have defaults that classify money from a customer as "Revenue" and anything you buy for a job as "Cost of Goods Sold". Indeed, this works for most businesses. It DOES NOT, however, work for your construction company. In fact, the consequences in your paying several times your actual tax obligation as a result of "Phantom Income" is extremely likely.
PHANTOM INCOME
Phantom Income are customer deposits or payments for projects that have not commenced or been completed and mis-characterized/posted as revenue. This sort of accounting treatment overstates profits and if not offset by respective costs, results in the overpayment of tax liability.
CONSTRUCTION INCOME
In construction, you haven't actually made a profit until you have secured a Certificate of Occupancy (CO).
If the construction timeline for the project extends past your fiscal year end, reporting draws, deposits or payments from your customer as revenue is now "Phantom Income".
The IRS has acknowledged and recognizes this accounting treatment deficiency that exists for builders, and has issued treatment guidelines to specifically address this problem.
THE INTEGRITAS SOLUTION
Integritas Investment Partners uses the Net of Contract methodology in accordance with approved IRS guidelines (IRS Accounting for Construction Contracts).
Call Integritas for a free consultation and learn how we can significantly improve your accounting whilst substantially deferring/reducing your company’s tax liability.

Completed Contract Method
With this method, you report all the income from the contract and deduct all the related job costs in the year the project is considered complete.
The number of indirect costs that you must characterize as job costs will vary depending on your size. In general, a large homebuilder has to capitalize a greater number of indirect costs than a small homebuilder or small general contractor. You should consult your tax advisor regarding types of indirect costs that you must capitalize.
G&A expenses, net of any amounts included in job costs, should be deducted as explained in the Accrual Method.
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