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

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easonably expected to be used in the production of the subject matter of therelated party's contract.Treas. Reg. § 1.460-1(b)(4) defines a related party as a person whose relationship to ataxpayer is described in IRC § 707(b) or § 267(b) which includes:• A partnership and a person owning, directly or indirectly, more than 50 percent ofthe capital interest, or the profits interest, in such partnership.• Two partnerships in which the same persons own, directly or indirectly, morethan 50 percent of the capital interests or profits interests.• Members of a family, including only brothers and sisters (whether by the whole orhalf blood), spouse, ancestors, and lineal descendants.• An individual and a corporation, more than 50 percent in value of the outstandingstock of which is owned, directly or indirectly, by or for such individual.• Two corporations which are members of the same controlled group.• A grantor and a fiduciary of any trust.• A fiduciary of a trust and a fiduciary of another trust, if the same person is agrantor of both trusts.• A fiduciary of a trust and a beneficiary of such trust.• A fiduciary of a trust and a beneficiary of another trust, if the same person is agrantor of both trusts.• A fiduciary of a trust and a corporation more than 50 percent in value of theoutstanding stock of which is owned, directly or indirectly, by or for the trust or byor for a person who is a grantor of the trust.• A person and an organization to which section 501 (relating to certaineducational and charitable organizations which are exempt from tax) applies andwhich is controlled directly or indirectly by such person or (if such person is anindividual) by members of the family of such individual.• A corporation and a partnership if the same persons own--more than 50 percentin value of the outstanding stock of the corporation, and more than 50 percent ofthe capital interest, or the profits interest, in the partnership.• An S corporation and another S corporation if the same persons own more than50 percent in value of the outstanding stock of each corporation.2-9
• An S corporation and a C corporation, if the same persons own more than 50percent in value of the outstanding stock of each corporation• Except in the case of a sale or exchange in satisfaction of a pecuniary bequest,an executor of an estate and a beneficiary of such estate.Example:An architectural firm enters into a contract with a customer to design an office building.The contract is for the performance of services, and therefore would not be classified asa long-term construction contract. If, however, the architect's related constructioncompany enters into a contract with the same customer to build this "designed" building,and the construction company is required to account for the long-term constructioncontract under the PCM, the architect must account for the design services under PCMsince the services are incidental to the related construction company's contract.Severing and Aggregating ContractsUnder IRC § 460(f)(3), contractors are permitted and may be required to sever oraggregate contracts. Severance treats one agreement as two or more contracts.Aggregation treats two or more agreements as one contract. Whether an agreementshould be severed, or two or more agreements should be aggregated, depends, withcertain exceptions, on the following factors as provided in Treas. Reg. § 1.460-1(e):• Pricing. Independent pricing of items in an agreement is necessary for theagreement to be severed into two or more contracts.• Separate delivery or acceptance. An agreement may not be severed into two ormore contracts unless it provides for separate delivery or separate acceptance ofitems that are the subject matter of the agreement. The separate delivery orseparate acceptance of items by itself does not, however, necessarily require anagreement to be severed.• Reasonable business person. Two or more agreements to performmanufacturing or construction activities may not be aggregated into one contractunless a reasonable business person would not have entered into one of theagreements for the terms agreed upon without also entering into the otheragreement(s).A taxpayer may not sever a long-term contract that would be subject to the percentageof completion method without obtaining the Commissioner's prior written consent.2-10
Page 1 and 2: Internal Revenue ServiceConstructio
Page 3 and 4: De minimis Construction Activities.
Page 6 and 7: Tax Issues.........................
Page 8 and 9: Table of Contents / Chapter 2Intern
Page 10 and 11: through project managers and onsite
Page 12 and 13: plants are classified in this categ
Page 14 and 15: measured. The object of the cost co
Page 16 and 17: Time and material contracts are con
Page 18 and 19: Chapter 1 / Table of Contents / Cha
Page 20 and 21: job. Even though the average annual
Page 22 and 23: contract would be classified as a s
Page 24: Non-Long-Term Contract Activities (
Page 29 and 30: ConclusionThe construction industry
Page 31 and 32: 460(e)(1)(B) any other construction
Page 33 and 34: oth businesses are considered when
Page 35 and 36: Subject to the provisions of subsec
Page 37 and 38: method would normally be required b
Page 39 and 40: Rev. Proc. 2002-28 Section 6 Exampl
Page 41 and 42: Example 18 of Revenue Procedure 200
Page 43 and 44: • When payment is due• When pay
Page 45 and 46: Example of Retainage Payable:A cont
Page 47 and 48: (approx. the remaining 3% of total
Page 49 and 50: Revenue Code. Other employee benefi
Page 51 and 52: Generally contractors meeting the
Page 53 and 54: Assume a calendar-year corporation
Page 55 and 56: 2000 2001 2002Job 1 - in process in
Page 57 and 58: completed during the taxable year.
Page 59 and 60: specific “facts-and-circumstances
Page 61 and 62: Year 1: At year end, the taxpayer
Page 63 and 64: Subcontracted costs represent eithe
Page 65 and 66: 1.460-2(d), the applicable percenta
Page 67 and 68: • Verify that warranty expenses a
Page 69 and 70: If the contractor had billed and re
Page 71 and 72: Example of hypothetical computation
Page 73 and 74: commencement date, and (2) has a gr
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(A) first allocating income under t
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Percent Complete 11.6 % 60.00% 100.
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The income tax liability, computed
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Hypothetical Overpayment of Tax 300
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Simplified Marginal Impact Method (
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determined in this step may be limi
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liability or a tax refund. Treas. R
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Balance Sheet AccountsWhen accounti
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Revenue RecognitionAs discussed abo
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XYZ CorporationStatement of Income
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XYZ CorporationSchedule 2 - Contrac
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Chapter 6 / Table of Contents / Cha
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(A) Dwelling units, as defined in s
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Treas. Reg. § 1.263(a)-2 sets fort
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into a long-term contract and would
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B. Contracts which are expected to
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Normally each house is a separate c
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• Developer’s identifying infor
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Commissioner may use her statutory
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) All obligated common improvement
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contractor owned 51% of the joint v
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advice of the construction manager,
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Homebuilder Building for Speculatio
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will frequently reveal an interest
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expense. Revenue Procedure 2003-80,
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Examiners should consider the “do
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• Reg. §1.446-1(c)(1)(ii) - Unde
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• Homebuilders - IRC § 56(a) app
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The initial interview is the best t
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• Tour the business sites and rec
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• A high percentage of cash expen
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• A review of the taxpayer’s pr
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Clearly, the examiner’s judgment
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Chapter 9 / Table of Contents / Cha
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classified as either (1) a partners
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Liquidation/Distribution Issues•
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work, but also the means and detail
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• In Publication 1779, Independen
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for other tax purposes. For further
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Chapter 11 / Table of Contents / Ch
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• Availability of IRS and taxpaye
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Fast Track Mediation works best for
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Chapter 12 / Table of ContentsInter
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eturns with taxable years ending on
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EFTPS EnrollmentTo participate in E
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Appendix 1 - Applicable Federal Tax
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Page 169 and 170:
Page 171 and 172:
Page 173 and 174:
Available Accounting Methods for Lo
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Appendix 3 - Construction Industry
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Plumbing, Heating,Cooling Contracto
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June 1953October 1955July 15, 1981A
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PRODUCTION PERIOD INTEREST IS ALLOC
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elated costs• Productionperiod in
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TermBONDING CAPACITYBONUSBRIDGE LOA
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COMMITMENT FEECOMPLETED-CONTRACT ME
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CONTRACTto the actual construction
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HARD DOLLARCOSTSHISTORICSTRUCTUREHO
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MECHANIC’S LIENNEGOTIATED BIDOFFS
Page 195 and 196:
PROGRESSPAYMENTSPROGRESSSCHEDULEPRO
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