Section 460 Studies for Contractors

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Section 460 Studies for Contractors

TAX METHODS OF CONSTRUCTION ACCOUNTING–NUMEROUS CHOICES?

A. Overview of a contractor’s long-term contract accounting choices.

1. The cash method;

2. The accrual method;

3. The accrual method, excluding retentions;

4. The hybrid method; and

5. Long-term contract methods (Internal Revenue Code Section 460).

B. Depending on size of its revenues, a contractor may need to choose both an overall method of accounting and a method for long-term contracts.

C. Long-term contracts under Internal Revenue Code Section 460.

1.  Definition of a long-term contract (Code Section 460(b)).

2. A “long-term” contract is a contract that is not completed within the same taxable year in which it is entered into.

3. Thus, a contract need only span two (2) taxable years to be eligible for long-term contract accounting.

4. In addition, the contract must either be a “building, installation, construction, or manufacturing contract” to qualify for long-term.

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