Content area
Full Text
Several provisions in the Internal Revenue Code provide incentives for businesses in the construction industry that allow them to directly reduce their tax liability and thus, indirectly, their overall costs. These provisions are meant to provide lower costs for home owners and businesses owning real estate, to provide jobs in the construction industry, and to provide a greater rate of return for those investing in construction businesses. These provisions include Qualified Rehabilitation and Low Income Housing Credits, §179 expensing deduction, bonus depreciation, Domestic Production Activity Deduction, and the completed contract method of accounting.
Consistent with prior incentives, to prevent firms from benefiting more than what Congress intended, the rules are complex and sometimes ambiguous. For example, it is common for a construction contractor with a longterm contract to have to recognize additional costs in a year after the contract was completed. For financial accounting purposes, adjustments that are related to a closed contract should be reflected in income in the period in which the amounts can be reasonably determined.1 For tax purposes, when a taxpayer is using the percentage of completion method those same adjustments must be accounted for by using a permissible method of accounting,2 which could be yet a different method of accounting and would require that the allocable contract cost be included in the lookback calculations.3 While complexity may lead to mistakes in the preparation of tax returns, ambiguity leads to uncertainty. Mistakes are difficult to account for since they are unintentional and are unknown until they are discovered, but uncertainty created by ambiguity will vary by taxpayer and tax return preparer. The more risk a taxpayer or tax return preparer is willing to take with aggressive tax positions, the greater uncertainty inherent in the entity's income tax provision.
Financial accounting regulators, tax lawmakers, and the Internal Revenue Service (IRS) are addressing the issue of aggressive tax positions by changing the rules that affect all entities that prepare financial statements and tax returns. Recognizing the right of a taxpayer to minimize their tax liability, the authorities are utilizing disclosure to discourage overly aggressive tax positions. In this column we examine three of these developments: disclosure requirements reported on IRS Form 8275 and Form 8275-R; Financial Accounting Standards Board (FASB) Interpretation No....