It’s a general requirement for construction contractors in the state of California who sell or lease personal property to register with the California Department of Tax and Fee Admission.
Typically, if construction contracts are performed for the U.S. Government exclusively, you aren’t required to have a seller’s permit. The same goes for if you’re a general contractor who hires subcontractors. A safe rule of thumb is, if you earn gross receipts of $100,000 annually, then you must be registered for a Consumer Use Tax Account.
But once you have an account, then what? How do you then estimate the total costs and revenue for your annual gross income? In construction, as in any creative industry, a contract is integral. A contract can vary in duration, from only a month to one that begins in one taxable year and ends in another.
When utilizing contracts, gross profit is tracked, computed, and revisited at the completion. This lays the burden on the contractor to review the contract and compare estimates to actual gross profits—and the resulting taxes paid. Each contract must go through this process: and this process is known as percentage of completion.
What is Percentage of Completion?
This percentage of completion method (PCM) became mandatory with the Tax Reform Act of 1986. Reviewing contracts as a rule was crucial to avoiding inaccurate estimates—such as if a contractor did not anticipate profits of a certain size and taxes were not properly paid on the actual amount of profit made.
Accounting in construction can be complicated—particularly when considering scope creep and other pitfalls associated with contract work. For more information about the specifics of taxes in construction, contact Atherton & Associates, LLP.