On August 10, 2010, Reps. Wally Herger (R-Calif.) and Shelley Berkley (D-Nev.) introduced the American Job Builders Tax Reform Act of 2010 (H.R. 6097). While still in the first steps of the legislative process, this bill would modify the tax code and dramatically affect small construction contractors.
Current law defines a small contractor as having average annual gross receipts of less than $10 million dollars. There has been no adjustment to this amount for inflation since its inception in 1986. Contractors that exceed this amount cannot use the completed contract method (CCM) when determining gross profit. They are required to use the percentage of completion method (PCM), which requires the use of estimates and potentially inaccurately reports gross profits. This bill proposes to increase the threshold to $40 million and index the threshold for inflation, allowing more contractors to begin using the CCM.
The bill would also provide relief from Alternative Minimum Tax (AMT). Currently, small contractors are required to report an adjustment under AMT for the deferred gross profit from contracts reported under the CCM. This bill would eliminate this AMT adjustment and help small contractors to avoid falling into an AMT liability.
These modifications to the current law would also eliminate the “look back” calculation for both regular and AMT purposes placed upon small contractors. Current law requires small contractors substitute the actual gross profit percentage on the completed job for the estimate used in the PCM calculations and “look back” to determine if revenue was under or over reported.
The bill has been referred to the House Committee on Ways and Means. Kentucky members on this committee are Rep. Geoff Davis (R-KY) and Rep. John Yarmuth (D-KY). While in committee, the bill will be deliberated, investigated and revised before it goes to general debate. Committees rarely provide basic public information and the majority of bills never make it out of committee.
We’ll keep you posted as we continue to learn more on this matter.
Byron Largen, CPA
Tax Partner
