Associated Builders and Contractors (ABC) applauded the introduction of the American Job Builders Tax Reform Act of 2011 (H.R. 1993), a bipartisan bill sponsored by Reps. Wally Herger (R-Calif.), David McKinley (R-W.Va.) and Shelley Berkley (D-Nev.), that will modify the tax code to help small construction contractors that are facing increased costs in energy, labor and materials.
“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 contract income at the conclusion of their jobs.
“The provisions in this bill will enable contractors to retain capital in their businesses for a longer period of time allowing both investment and potential opportunities for job growth,” said Rich Shavell, CPA, a member of ABC’s Tax Advisory Group and president of Shavell & Company, P.A. in Boca Raton, FL.
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.
The bipartisan bill also provides relief from Alternative Minimum Tax (AMT). Since H.R. 1993 allows for small construction contractors to utilize CCM, taxes on the gross profit can be deferred until the project is complete. However, under current law gross profit is not deferred for AMT purposes. Therefore, the provision in HR 1993 to eliminate this AMT adjustment will help small contractors to avoid falling into the AMT trap.
By increasing the threshold and eliminating the AMT adjustment under this bill, small construction contractors will no longer be subject to “look-back” calculations for both regular and AMT purposes. Current law requires that when a contract is completed, the contractor must “look-back” and perform calculations that substitute the actual costs and revenues for the estimated costs and revenues that were used in the PCM calculations.