SVA's 2021 Tax Year Review: Construction Industry

In this Biz Tip, SVA’s construction industry experts share some common problems and issues their construction clients faced in the 2021 tax year and ways construction companies can prepare for 2022.

Was there a common problem or issue found with construction clients in the 2021 tax season?

SVA’s professionals receive many calls relating to bulk purchases of materials. With supply chain issues drastically affecting the construction industry, many contractors have turned to making bulk purchases of materials due to long lead times.

In some cases, they are looking at purchases exceeding $1M worth of materials to ensure they have what they need for upcoming projects. This can mean significant deposits recorded on the company’s books for materials not yet received as of year-end.

Additionally, contractors need to consider uninstalled materials and how they may affect the company’s bottom line at year-end. These are just a couple things to make note of when purchasing in bulk up-front.

Continuing supply chain complications have left many construction contractors with the decision on which way to go in regard to purchasing materials. Talk with an accountant to see which decision is best for your company.

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Were there common questions asked by construction clients regarding their 2021 return?

One of the primary discussions between contractors and SVA related to the completed contract flip issue.

Many contractors switched from Percentage of Completion method to Completed Contracts method of accounting when the TCJA was passed, allowing the completed contract method to be used if a contractor’s gross receipts were $25M vs. the previous amount of $10M.

This resulted in contractors getting a big deferral of income when they switched methods.

• Completed Contracts method allows contractors to recognize all the income on the job once it is complete, so for jobs over 2 years, they can defer to next year.
• Percentage of Completion method requires contractors to recognize income as the project progresses.

With income being deferred year-to-year based on the timing of when jobs are completed, it can result in certain years having higher levels of income, especially if the number of jobs in progress are low. Contractors need to be prepared for the tax consequences of those higher-income years.

The method you choose could have a big effect on your business. Schedule time to meet with an accountant to figure out which method fits your company the best.

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Looking ahead to 2022, what tax recommendations does SVA have for construction businesses?

With supply chain issues looking to continue in the foreseeable future, it’s important to adapt to purchasing methods that will benefit your company from a profit point of view. Additionally, the accounting methods you choose can ultimately affect the amount of tax you pay in any given year.

SVA’s construction accounting experts assist clients with these questions and issues and can give your company a fresh perspective on ways your construction company can navigate these hurdles and continue to succeed.