December 31 is rapidly approaching. That one day is significant for many tax calculations and decisions.
New Years Eve is cause for festive celebrations and effective tax planning. Many tax rules focus on that date for deductions and income for several sections of tax law. Documentation is essential to maintain tax positions if challenged by the IRS. Here is a list of some of those date-sensitive items, briefly discussed.
Equipment purchases in December are always a tax planning tool, but the equipment not only has to be acquired but actually placed in service by December 31 for a 2024 deduction.
Collection of receivables by the contractor using the cash method is a December 31 critical date. But if the contractor could have received the payment but elected not to, or just did not deposit the checks, it is constructively received and is income in 2024.
Contractors using an accrual method will bill or not bill their customers in December depending on not only the terms of the contract but also the need to accelerate or defer revenue on an accrual method. However, if billing is done contrary to the terms of the contract, it could cause problems with both the customer and the IRS.
Contractors using the completed contract method (CCM) look at December 31 closely, analyzing the rules of contract completion and the status of the contracts at that date for revenue to be recognized in 2024 or deferred to the next year. Perhaps revenue can be deferred or losses can be accelerated into 2024 depending on the status of the contract on New Years Eve.
Even the definition of a long-term contract depends on December 31. If the contract was completed in the year it was entered into, it is not a long-term contract and escapes many of the complex tax rules of those contracts, like the percentage of completion calculation, the look-back method, etc.
Estimates as of December 31 are crucial for the proper implementation of the 10-percent method, the 95-percent rule, the 80-percent rule for home construction contracts, and the total contract price for the percentage of completion method (PCM), and the total estimated costs for the PCM.
Timing of transactions before or after December 31 can change the tax return, such as assigning materials out of inventory to a job may increase taxable income for the PCM.
Rules on top of rules make the date more challenging. A contract that may or may not be complete at that crucial date for the CCM, may impact the calculation of the average annual gross receipts (AAGR) which may determine if the contractor has to use the PCM in the following year. Deferring the completion of one contract may not only result in the deferral of some income for 2024 but may also result in a calculation of the AAGR that will defer the PCM requirement for another year.
Questions or comments? Contact Al Clark at 404-252-2208 or AClark@SmithAdcock.com
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