Construction Industry - Audit Technique Guide - Uncle Fed's Tax ...

Real Property and its Integral Components under Treas. Reg. § 1.460-3(a)A contract not completed in the contracting year is a long-term construction contract if itinvolves the building, construction, reconstruction, or rehabilitation of real property; theinstallation of an integral component to real property; or the improvement of realproperty (collectively referred to as construction).Real property means land, buildings, and inherently permanent structures, as defined insection 1.263A-8(c)(3), such as roadways, dams, and bridges. Real property does notinclude vessels, offshore drilling platforms, or unsevered natural products of land.An integral component to real property includes property not produced at the site of thereal property but is intended to be permanently affixed to the real property, such aselevators and central heating and cooling systems.Example:A contract to install an elevator in a building is a construction contract because abuilding is real property, but a contract to install an elevator in a ship is not aconstruction contract because a ship is not real property.Example:A taxpayer enters into a contract to manufacture an elevator; however, an unrelatedparty will install it. The contract for the manufacture of the elevator is not a constructioncontract. Even though the elevator is considered an integral component to realproperty, the regulations define a construction contract as one that involves theinstallation of the integral component.Classification of ContractsA taxpayer must determine the classification of a contract on a contract-by-contractbasis as one of the following:• Long-term construction contract,• Long-term manufacturing contract, or• Non-long-term contractTreas. Reg. § 1.460-1(b)(2)(i) clarifies that a contract's classification should be based onthe performance required of the taxpayer under the contract, regardless of whether the2-4