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Tax Deferral Opportunities for Contractors

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The Tax Cuts and Jobs Act has redefined the definition of a “Small Taxpayer,” creating tax deferral opportunities for eligible contractors.

Previously, pass-through entities (e.g. LLCs, S corporations, Partnerships) that exceeded $10 million in average gross receipts were required to use the accrual percentage of completion method for long-term contracts. The accrual method recognizes revenue at the point where it is earned rather than when cash is actually received (cash basis). Additionally, C corporations that exceeded $5 million in average gross receipts were not eligible to use the cash method of accounting, and C corporations that exceeded $10 million were required to use the accrual percentage of completion method for long-term contracts.

Under the new law, these thresholds have been increased to $25 million, giving contractors with less than $25 million in average gross receipts several options to consider (regardless of how they are structured) when choosing their accounting method, including the overall cash method, completed contract method, accrual excluding retainage, or other permissible contract methods.

Structure: Previous Tax Law: Under Tax Reform:
Pass-through entities (LLCs, S Corps, Partnerships, etc.). with over $10 million in average gross receipts. Required to use accrual based accounting for revenue recognition on long-term contracts. Numerous options are available, from overall cash method, completed contract method, accrual excluding retainage, or other permissible contract methods – provided that they have less than $25 million in average gross receipts.
C-Corporations with over $5 million in average gross receipts Not eligible to use the cash basis method of accounting.
C-Corporations with over $10 million in average gross receipts Required to use the accrual method of accounting.

 

Confused? The new tax laws are complicated, and this is just one of many tax reform changes affecting the construction industry. For more information on understanding tax reform and its impact on contractors, check out our latest BP Report. And as always, connect with your BP representative at 425-454-7990 to learn more. We’re here to help!


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