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Construction Industry Edition

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Description

IRS Tax Audit Manual for the Construction Industry

Overview of the industry including a glossary. Discusses types of contracts; types of contractors (large, small, home builder); change of accounting method; and joint ventures.

TABLE OF CONTENTS

  • Chapter 1
    • Introduction to the Construction
    • Industry Intended Audience 1-1
    • The Construction Industry as a
    • Market Segment 1-1
    • Participants in the Construction Industry 1-1
    • Contractors 1-1
    • General/Prime Contractors 1-2
    • Construction Managers 1-2
    • Commercial Contractors 1-2
    • Commercial Project Owners 1-3
    • Residential Construction Developer 1-3
    • Subcontractors 1-3
    • Highway Contractors 1-4
    • Heavy Construction Contractors 1-4
    • Architect/Engineers 1-4
    • Material Suppliers 1-5
    • Construction Lenders 1-5
    • Surety Companies 1-5
    • Multiple Roles 1-5
    • The Contracting Process 1-6
    • Scheduling Subcontractors 1-7
    • Contract Income 1-7
    • Types of Contracts 1-8
    • Long-Term Contracts 1-8
    • Short-Term Contracts 1-8
    • Fixed Price or Lump Sum Contracts 1-8
    • Cost-Plus Contracts 1-8
    • Time and Material Contracts 1-9
    • Unit Price Contracts 1-9
    • Change Orders 1-9
    • Bonding 1-10
    • Building Permits 1-10
    • Notice of Completion 1-11
  • Chapter 2
    • Small Contractors Long-Term Contracts 2-1
    • Cash Method 2-1
    • Accrual Method 2-2
    • Percentage of Completion Method 2-2
    • Cost Comparison Method 2-2
    • Work Comparison Method 2-3
    • Completed Contract Method 2-3
    • Cash Versus Accrual 2-4
    • General Background 2-4
    • General Guidelines For Examiner 2-9
    • Alternative Minimum Tax 2-10
    • Potential Issues and Audit Techniques 2-10
    • Obtaining Audit Information 2-10
    • Income Recognition Issues 2-12
    • Income Omission Issues 2-13
    • Underreported Income 2-13
    • Miscellaneous Construction Issues 2-14
    • Schedule M-1 Adjustments 2-17
  • Chapter 3
    • Large Contractors Long-Term Contracts
    • Under IRC Section 460 3-1
    • Definition of Long Term Contracts 3-1
    • Contracts Subject to IRC section 460 3-2
    • Contracts Exempt form IRC section 460 3-2
    • Ten Percent Election 3-2
    • Gross Receipts Test 3-3
    • Simplified Cost-to-Cost Method 3-4
    • Revenue Earned Allocations Rules 3-4
    • Allocation of Costs to Long-Term Contracts 3-5
    • Special Rules for Cost-plus and Federal
    • Long-Term Contracts 3-11
    • Severing of Construction or Manufacturing
    • Contracts 3-14
    • Aggregation of Construction or Manufacturing
    • Contracts 3-18
    • Look-Back 3-20 Form 8697,
    • Interest Computation
    • Under the Look-Back Method for
    • Long-Term Contracts 3-21
    • Computation of the Look-Back Method 3-29
    • Information Generally Needed to Audit a
    • Construction Company 3-34
    • Suggested Audit Techniques 3-34
  • Chapter 4
    • Home Builders Home Construction
    • Contract Defined 4-1
    • Classes of Home Construction Contracts 4-2
    • Houses Built of Speculation 4-5
    • Houses Built under Contract on Contract’s Land 4-7
    • Home Builder Building on Buyer’s Land 4-7
    • Contractor Working for a Home Builder 4-7
    • Land Developer Estimated Cost of
    • Common Improvements 4-13
    • Interest Capitalization 4-16
  • Chapter 5
    • Change of Accounting Method What Is a
    • Method of Accounting 5-1
    • What Is a Change of Accounting Method 5-1
    • Identifying What Is Not a Change in an
    • Accounting Method 5-2
    • Correction of an Error 5-2
    • Change in Underlying Facts 5-2
    • Permanent Difference Not Involving Timing 5-3
    • Taxpayers Under Examination and Requesting
    • to Use Rev. Proc. 97-27 5-3
    • Example of Change in Accounting Method 5-4
    • IRC Section 481(a) Adjustment Calculation 5-6
    • Computation of the “Current Year Adjustment” 5-7
    • IRC Section 481(b) Tax Limitation 5-8
  • Chapter 6
    • Construction Joint Ventures Construction
    • Joint Ventures 6-1
    • Types of Joint Ventures 6-1
    • Joint Venture Examination 6-2
    • Information Document Requests 6-3
    • Potential Joint Venture Issues 6-4
    • Formation Issues 6-4
    • Operation Issues 6-5
    • Liquidation/Distribution Issues 6-5
  • Appendix
  • Appendix A, Section 460 Flowchart A-1
  • Appendix B, Cost Capitalization B-1
  • Appendix C, Notice 89-15 C-1
  • Glossary G-1
Don’t forget – The IRS Tax Audit Manual for the Construction Industry is tax deductible as a business expense!