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Accounting method

1948 Views 7 Replies 8 Participants Last post by  Moxley-Kidwell
I am a small corporation that started in 2013. I build spec houses on the side and had no sales. I started and finished my first home in 2013 and had a pending sale in December but didn't close until January this year. This was the only project worked on. I don't have a lot of other deductions that I will be taking outside of pickup, trailer, skid loader and some tools. As I calculate all of my business expenses and the receipts towards the house, i am wondering if I should do the cash or accrual method of accounting. I would have a loss of $120k this year, but gains of $150k next, with not much to deduct, unless I start another house. I am thinking of the cash method to offset some Capitol gains from personal investments since I file together on schedule k. I haven't used an accountant yet and don't plan to until I finally make the leap and do this full time or do work outside of spec houses. I am looking for thoughts on whether or not to stay with the cash method or use the accrual method and pros and cons in how it applies to me
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Over the long run accrual is the most even and consistent. Cash method can get you some benefit this year, but like you say it will cost you next year. The dollar amounts can swing wildly for and against you if you don't have a consistent even $ flow of projects

Was always told by the accountants: "pick one stick with it. IRS very likely will go fishing if you switch... Accrual is best in most cases"
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You should speak with an accountant before choosing. I believe IRS requires paperwork to change method. I suspect few accountants will recommend accrual for a small contractor. Accrual is good for hyper-accurate financial reports. Cash is good for non-accounting types.
Yes, a form is required to change. I'm very small and use accrual to help even out my reportable income.

I would love to know other solutions to help with accounting when doing a couple large projects a year that might close right after the tax year ends.
Your acct is the best person to help make this decision. Like others have stated, pick one and stick with it. Another thing that comes into affect is if you are percentage of completion or contract complete. This can change when you show the income regardless of cash or accrual depending on when you complete the project.
I prefer accrual. Any time I can move an expense up a month I can push the tax liability back. When I get my annual bill for insurance in May, I can take the whole deduction this year rather than just what I paid monthly.

I don't see where it would make much difference on the capital gains for this year.

As far as the sale goes , just book the loss now and carry it forward to offset the sale this year.
I kind of wish we had chosen a cash basis. On a percentage complete basis in my world you are stuck trying to estimate the remaining material and labor on the job. We have a bunch of contracts that go on for several years due to the nature of our work. We build new roads in new subdivisions but can't install the final surface of asphalt until all of the houses are complete. It may not really bother you if you only have a few things going at the end of the year though.

There is also something called the alternative minimum tax that may come into play if you are going to show a loss for the year just because you haven't completely finished a contract but have made money through the year. The tax man is going to get his no matter what. Good luck.
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