Estimated Tax Planning for Construction Company – In the video above I go over estimated tax planning for construction companies. If you are a contractor making less than $10,000,000 per year in revenue, you most likely file your taxes using the Completed Contract Method. If you make more than $10,000,000 in revenue, there are regulations that require you use the Percentage of Completion Method, which is not as beneficial from a tax standpoint.
The Completed Contract Method allows you not to recognize those properties that were not complete as of year end. But with the Percentage of Completion Method, you have to, as the name implies, recognize a percentage of those properties based on your actual cost incurred to date. So you’re usually showing revenue on uncompleted jobs. With the Completed Contract Method, you’re not showing any revenues on any jobs that aren’t materially done by the end of the year.
In the video, I use a construction company that is earning in the neighborhood of $7,000,000 a year as an example of how to do the Completed Contract Method in QuickBooks. Non-construction companies use the simple cash or simple accrual method and some smaller construction companies do it that way. But it’s beneficial from a tax standpoint to do it to using the Completed Contract Method because, as I mentioned above, you gain the advantage of not having to recognize the income that you received during the year on uncompleted jobs.
Spec homes, where you are building a house on land that you own, are handled a little differently in QuickBooks than regular contracts, where you are building a house on land owned by someone else. In the case of spec homes, you map them to the Cost of Goods Sold account but with regular contracts you map them to the Direct Costs on the Profit and Loss statement–direct materials, direct labor, that sort of thing.
The spreadsheet that use for the Completed Contract is not only for estimating taxes. That’s a great benefit of it–you can do that and figure out how much you’re going to owe towards the end of the year–but it’s also useful for making sure each job is showing a decent profit and everything stays on track. If you do this at least once a quarter or better yet, once a month, it’ll give you some peace of mind and prevent you from being caught off guard by any jobs that are suddenly not making money. Also, for longer term contracts, you can do fade analysis and gain analysis to make sure each month is in tune with what you think is going on and make sure you’re not showing a gain here then a huge loss there. Instead, you can make sure everything is staying consistent month to month.
Thanks for watching this video about Estimated Tax Planning for Construction Company. I hope it was helpful.