Contractors Could Benefit from the 10% Election

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.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

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.

© 2023 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Automobile, Tax BY Brett Cubellis
Explaining the Transfer/Advance Payment of Clean Energy Credits and Energy Credits Online Registration
New Research and Development Capitalization Requirement Shuffles System
Contractors May Benefit From SALT Cap Workaround
Construction Talent Retention
Construction Talent Foundations
2023 Legislative & Regulatory Update
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us
Pittsburgh

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.

×