New Legislation Could Change How Contractors File and Pay Taxes

Last week, The American Job Builders Tax Reform Act of 2011 was introduced in the house as a bi-partisan bill (sponsored by Reps. Wally Herger (R-Calif.), David McKinley (R-W.Va.) and Shelley Berkley (D-Nev.)) to update how contractors are taxed. The introduction was immediately applauded by the Associated Builders and Contractors, who claim the bill will modify the tax code to help small construction contractors that are facing increased costs in energy, labor and materials. You can track the bill on GovTrack here. This isn't the first time at the rodeo for the American Job Builders Tax Reform Act.  It was introduced last session, but died without any action. ABC and small contractors around the country are hoping for a different fate this session. The proposed effects of this bill are best explained by the ABC in their press release last week as follows:
“The problem facing construction contractors is that they have been forced to pay income taxes on projects based on estimates rather than having the option of paying taxes when the contract is completed,” said Robin Word, chairman of ABC’s Tax Advisory Group and president of Word CPA Group in Jackson, Miss. “However under this bill, the definition of ‘small contractor’ will enable more contractors to report contra ct income at the conclusion of their jobs." Under current law, construction contractors cannot use the completed contract method (CCM) of accounting if average annual gross receipts exceed $10 million - a figure that has not been adjusted for inflation since the threshold’s inception in 1986. Instead, contractors are required to use the percentage-of-completion method (PCM) which does not accurately reflect profits because of the required use of estimates. The American Job Builders Tax Reform Act increases the threshold to $40 million and also indexes the threshold for inflation.
To put it simply, if a contractor has gross revenue over $10m, it must "estimate" its profits on any active construction projects when filing taxes. The actual profits it receives may be more or less than this estimate, whereupon the contractor has to alert the IRS of the difference and either get a credit or pay the difference.  Those contractors with less than $10m in revenue can simply wait forthe project to be completed before being obligated to pay taxes on the profits.  The new bill proposes raising the exemption figure from $10m to $40m, encompassing a larger number of contractors in the US. We'll monitor this bill and report any updates.  A tip of the hat to New Orleans City Business' blog for calling my attention to the bill.
Scott Wolfe
About the Author: Scott Wolfe
Scott Wolfe, Jr. obtained his J.D. degree from Loyola University of New Orleans, and his B.A. from Southern Methodist University in Dallas, TX. In 2006, 2007, 2008 and 2009, Scott was recognized as a Leader in Law by CityBusiness Magazine. The son and grandson of general contractors, Scott is a construction litigator in the Pacific Northwest, and the founding member of the bi-coastal law firm, Wolfe Law Group. Scott is also the founder and CEO of Express Lien, Inc., a legal document preparation service for contractors. In 2008, City Business Magazine recognized Scott as one of its Innovators of the Year for the Express Lien concept. As an entrepreneur himself, Scott has a strong background in business and commercial transactions and laws. He focuses his practice on the legal issues facing the construction industry, and has represented clients in multi-million dollar construction disputes in litigation and alternative dispute resolution proceedings. Scott is a LEED AP.

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