In August, the IRS released Fact Sheet FS-2007-22, the 15th in a series on the tax gap, which is the difference between what a taxpayer actually pays in taxes and what the taxpayer would have paid if all taxable income and deductions were properly reported.

Fact sheet FS-2007-22 addresses the construction industry and discusses how contractors, subcontractors and individual workers need to be aware of everything that counts as income and proper accounting methods so they pay the proper amount. It also addresses the need to be aware of all deductible expenses so they don't overpay.

Commonly overlooked or non-reported income items include income derived from work paid for with cash, work done in exchange for goods or services in a barter exchange, and other income even if a Form 1099 or a W-2 is not issued to you.

The use of accounting methods is important when reporting income and expense for a construction company. Construction companies may need to choose two different tax accounting methods – one for an overall method of accounting and one for reporting income on long-term contracts. The cash and the accrual methods are two acceptable accounting methods. Common accrual methods used in reporting income on long-term contracts include the percentage of completion method and the completed contract method.

Ordinary and necessary expenses are valid deductions for a business. The fact sheet defines an "ordinary" expense as one that is common and accepted in the construction business. It defines a "necessary" expense as one that is helpful and appropriate for the construction business.

For more information on the proper reporting of income and expenses please contact your Rea professional.

-By Kent Beachy, CPA (Dublin office)

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