The Construction Industry And The Tax Gap
The IRS included in it’s e-News for Tax Professionals, detail information on Contractors, subcontractors and individual workers, not reporting or under-reporting business income from construction activities.
The IRS says businesses and individuals need to be aware of everything that counts as income and proper accounting methods in order to pay their fair share of taxes.
The report went on to say that businesses and individuals also need to be aware of all deductible expenses so that they don’t overpay their taxes.
The tax gap is the difference between the amount of taxes that should be paid in a given year and the amount actually paid voluntarily and in a timely way.
Income
Contractors, subcontractors, and workers must pay taxes on income received for all work, including side jobs and work that is paid for with cash. This includes work in exchange for credit on a bill. It also includes work that is done in exchange for goods or services in a barter exchange.
The IRS went on to stress that Contractors, subcontractors and individual workers are required to report their income even if a Form 1099 or a W-2 is not issued to them.
As for accounting methods, income and expenses are reported on tax returns based on one of two accounting methods, which include either the cash method or the accrual method. Your tax professional can help you determine which method is best for you. Most small business owners and individuals use the cash method. And business activities for contractors, subcontractors and individuals are usually reported on Schedule C.
Expenses
Based upon the IRS Tax Codes the Following holds true:
Ordinary and necessary business expenses are deductible. An “ordinary” expense is one that is common and accepted in the construction business. A “necessary” expense is one that is helpful and appropriate for the construction business. An expense does not have to be indispensable to be considered necessary.
An example of business expenses for Contractors, subcontractors and workers working in the construction industry are as follows:
Utilities
Car and truck expenses
Advertising
Employee salaries
Trade association dues
Rent expense
Supplies
Continuing education
Small tools expected to last one year or less
Steel toe work boots
Business licenses
Expenses for business assets that are expected to last more than a year must be capitalized and depreciated over their useful lives. Examples of assets include:
Cement mixer
Compressor
Ladder
Other heavy machinery
Buildings and real property
Personal expenses including clothing that can be worn off the job site, fines and penalties, and the non-business use of vehicles or computers cannot be deducted.
The above information is a summary of Income and Expenses for the Construction Industry. For further clarification of the Tax Code, visit irs.gov and use keywords: Business Expenses, Publication 535, Publication 463, Publication 334 and Publication 946
Cassandra Ingraham is a Tax Accountant and Instructor for Basic Tax Classes in the San Francisco Bay Area. During the balance of the year she can be found at http://www.taxeswilltravel.com providing Formal Introductions to Lenders for Accounts Receivable Funding (Factoring) and Purchase Order Funding.
Tags: article, construction, expenses, how to report, income, tax, tax gap, taxes
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