Many construction firms may be paying more taxes than they have to, reports a recent survey by the Cincinnati accounting firm of Jackson, Rolfes, Spurgeon & Co. (JRS).
Conducted via mail and the Internet this fall in Ohio and Kentucky, the survey asked heads of construction and contracting firms a series of financial questions. JRS was surprised by the number of firms that did not use the accounting method that provided the best tax advantage.
"When asked what revenue recognition method they used for tax purposes, over 60% responded they use the percentage of completion (POC) method," said Jeff Oehler, tax partner-in-charge of the firm’s construction industry service team. "This is somewhat unusual since most of the respondents annual revenue fell into the range of $1-10 million and the POC method does not offer the same tax advantages the OE completed contract method would."
The percentage of completion method requires the profit on each contract to be recognized as work is performed. On the other hand, the completed contract method allows a contractor to defer recognition of the profit on each contract until the contract is completed.
JRS offers an example: If a contractor uses the percentage of completion method, and has jobs in process at the end of the year with $3,000,000 of revenue recognized and 15% gross profit margin on those jobs, they would recognize $450,000 of taxable income on the jobs in process. Had the same contractor used the completed contract method, the $450,000 of gross profit and related $180,000 of income tax (assuming a 40% tax bracket) could be deferred to future years.
The survey also found that more than half of respondents do not have a strategic plan, nor do they intend on creating one.
"A strategy is like a roadmap. It provides direction, but allows for course corrections and new developments," said Jim Rolfes, managing partner of Jackson, Rolfes, Spurgeon & Co. "To run a business without a strategic plan is like floating in a lifeboat without oars. A formal strategic plan provides the structure, goals and benchmarks for growth and expansion."
When asked about the biggest threat to their companies’ growth, respondents cited the tight labor market, government regulation, the economy, and lack of demand for their services.
For a copy of the survey, visit www.jrscpa.com and complete the "contact us" form or call Brenda Collins, marketing director, at (513) 595-8800.