As the compliance season for preparation of 2019 income tax returns kicks off, companies are likely looking for last-minute ways to lower their tax liabilities. Contractors who use the percentage-of-completion method of accounting, for instance, should be aware of an important election that may help them defer recognition of income for tax purposes.
Under IRC Section 460(b)(5), contractors can elect to defer the recognition of gross profit under a long- term contract if, as of the end of the tax year, less than 10% of the total estimated contract costs have been incurred. The gross profit on these contracts continues to be deferred until the 10% threshold is met. A separate election statement is not required to be attached to a taxpayer’s return; rather, the election is made by using the 10% method for all long-term contracts entered into during the year on the taxpayer’s original return for the election year. Once made, the election applies to all future contracts and can only be revoked with permission from the IRS.
It’s important to keep in mind that recent changes to revenue recognition as a result of tax reform may impact a company’s ability to recognize revenue differently for book and tax purposes. For assistance in determining whether your company could benefit from the 10% election, please contact us.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.