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

completed. Under the method prescribed in Section 3.02 of Rev. Proc. 71-21, Bmust include three-fourths of the payment in 2000, but may choose to include theother one-fourth in income in either 2000 or 2001.Deducting Expenses under the Accrual Method of AccountingUnder the accrual method of accounting, expenses are deductible when all events haveoccurred that establish the fact of the liability, the amount can be determined withreasonable accuracy, and economic performance has occurred.Reg. §1.446-1(c)(1)(ii) Accrual method. (A) Generally, under an accrual method,income is to be included for the taxable year when all the events have occurred thatfix the right to receive the income and the amount of the income can be determinedwith reasonable accuracy. Under such a method, a liability is incurred, andgenerally is taken into account for Federal income tax purposes, in the taxable yearin which all the events have occurred that establish the fact of the liability, theamount of the liability can be determined with reasonable accuracy, and economicperformance has occurred with respect to the liability.The regulations define when economic performance has been met.Treas. Reg. §1.461-4(d)(2)Services or property provided to the taxpayer.(i) In general. Except as otherwise provided in Regulation §1.461-4(d)(5), ifthe liability of a taxpayer arises out of the providing of services or property tothe taxpayer by another person, economic performance occurs as theservices or property is provided.Accrual Method and RetainagesRetainages that are withheld from a contractor are generally included in income as thework, related to the retained amounts, is provided. The amounts have been earned.However Revenue Ruling 69-314 allows an accrual-basis taxpayer to elect to defer theretainages withheld until they are billable under the terms of the contract, which isnormally when the contractor has the right to receive the retention. The contractor mustalso defer retainages payable.If the taxpayer is not currently deferring the retainages and wants to elect this provisionunder Revenue Ruling 69-314, it is a change in method of accounting that requires theCommissioner’s permission.Retainages that the contractor withholds on subcontractors is not deductible until the“all-events” test is met. Therefore, even though economic performance has occurred(i.e. the subcontractor has completed a portion of the work) the all events test withrespect to the retainage may not be established if the contract requires full acceptanceand completion.3-15