Dear Smart,
Let's get the accounting period issue out of the way,
first, ok?
Essentially, unless you want to play with some fairly
complicated forms and prepayment of potential taxes,
you don't really want or need a non-standard accounting
period. A December 31 year end will work just fine.
What you're really asking though, is how to treat your
costs and income on these jobs.
Usually, when you're dealing with products, you'd have to
keep your books on an accrual basis. That means, in a really
brief overview, you report all the amounts you've billed out to
customers as income, even if you haven't collected the money.
And you report all your bills as expenses, even though you
haven't paid them. (You'll find more detail here:
http://www.irs.gov/formspubs/page/0,,id%3D11393,00.html )
In your case, you're special. You're involved in custom
construction projects. You can chose either the cash method
or accrual, using the percentage of completion method.
It all depends on whether your projects are long-term
(sometimes) or short-term (you can complete
them before year-end).
It also depends on whether you qualify as a small contractor
or not. (Under $10,000,000 in sales)
There's a great explanation here on IRS's site, with examples,
on how to go about doing the computations.
http://www.irs.gov/businesses/small/industries/article/0,,id=97986,00.html
Scroll down to the "Old Percentage of Completion Method."
If you can qualify as a small contractor, you can choose to
use the cash method of accounting.
That will let you take all those costs as a deduction right now.
And you won't report the income until you get it next year.
This is great if you have other income you want to shelter from
tax this year. Or if you have high taxes in earlier year that you
want to get refunded.
But, if you don't need the losses, you may just be better off
using the percentage of completion method. It will match your
costs with the final payoff on the job. You'll only report income
after you've earned it.
Do some reading. It is a little more complicated than it seems.
And if you are dealing with projects that size, I would advise
that you get a tax pro on board who is familiar with some of
the specialized issues involved with construction.
To me, they're second nature. I started out in construction
companies. So, I'm always startled when a tax pro doesn't have
a clue about certain common practices. But, most tax pros never
touch this area, so it's not a deficiency. It's just not their
area of expertise. So, it will take a bit of looking to find
the right person. (Call other construction-related companies
or vendors and ask who does their taxes and advises them.)
One other issue, besides accounting method and accounting period
that arises is sales tax. Since you are buying a pre-fabricated
product, it's likely that sales taxes will need to be collected
and paid. Check with your state's sales tax authority.
http://www.taxadmin.org/fta/link/forms.html
Now, aside from the tax issues, I do hope you know enough about
the construction industry to put a mechanics lien on the property
until you've been paid in full? Quite often, customers run out of
money before projects are finished and you wouldn't want to be
left holding the bag.
Sounds like an excellent idea for a business, though.
Best wishes,
Your TaxMama-ga |
