On Monday, Dec. 10, the Internal Revenue Service (IRS) announced a broad expansion of the cash method of accounting that puts an end to the sticky 'cash versus accrual' accounting question that has plagued smaller construction companies over the past 10 years. AGC has been very active in educating the IRS on this issue and attended a meeting with Commissioner Charles Rossotti at the IRS Washington office where the announcement was made.
'This decision by the IRS provides much-needed simplification of the tax code for small contractors,' said AGC Chief Executive Officer Stephen E. Sandherr. 'Our smaller members can use this simpler method of accounting for their businesses and no longer fear IRS auditors forcing them to adopt the accrual method of accounting.'
Under the new guidance, the IRS will allow most smaller service providers - including construction companies - with annual revenues under $10 million to be on the cash method of accounting rather than the accrual method. The cash method of accounting is the most practical accounting method because it recognizes income and expenses when the cash is actually paid to the company or by the company, AGC said.
AGC, along with other business trade associations, had argued to the IRS that the tax code allows the cash method of accounting for businesses with average annual gross receipts of $5 million or less. The IRS has largely ignored the $5 million exception for small contractors and has aggressively sought to force the accrual method on small contractors by applying a test to determine whether the contractor maintains inventories. The new policy will not require inventory tests to be applied to contractors and will also increase the cash accounting `safe harbor' to $10 million.
The revenue procedure is still in proposed form, but the IRS says businesses can rely on it for taxable years ending on or after Dec. 31, 2001. A comment period is open until March 2, 2002, and AGC will submit views on the proposal. A copy of the IRS press release revenue procedure can be found at the AGC website, www.agc.org, under legislative Information.