Is your company short on cash and wondering which bill to pay first? That bill should be your payroll taxes!
At one point or another, every business is going to be short on cash and will be faced with the challenge of figuring out which bill they should pay first. The first bill that you absolutely have to pay first is your is your payroll tax bill – otherwise it is going to cost you dearly in the long run!
Below is a real example, taken from the March edition of The General Ledger, a monthly newsletter from the American Institute of Professional Bookkeepers.
To deal with its financial problems T Corporation decided to pay several creditors, putting off for two quarters paying employment (payroll) taxes and filing related returns. T Corporation finally paid the taxes and over $30,000.00 in penalties and interest, then asked for a refund of the penalties, claiming that it had been “teetering on the brink of bankruptcy.”
The case then went to court and the IRS won.
An employer must pay federal employment taxes when it has the cash flow to make the payments. Spending the money for other purposes is considered to be “willful failure” to pay taxes.
If necessary, a taxpayer must make an effort to borrow the funds or delay payment of loans or obligations so it can pay the taxes. Failure to pay employment taxes may be excused when payment would cause “undue hardship,” defined as a substantial financial loss, such as losing business or contracts, facing actions against the company by creditors that would damage the business, or having to sell property at a sacrifice price to pay the taxes by the due date.
But T Corporation provided no proof of any hardship(s).
Moral of the story — pay your payroll taxes; if you can’t contact your tax advisor for help in working with the IRS to delay payment AND be prepared to show proof. Don’t just make the decision to not pay them or pay them late; it is too costly in the long run.
Happy Friday! Where has the week gone? I think for most of us, we’ve spent the week “digging out” from yet more snow!
This week, our Freebie Friday giveaway is a Project/Contract Information Worksheet.
Using a Project/Contract Information Worksheet is one of the best ways to document key information about requirements for a specific job and will help you to keep your project paperwork organized.
We’ve developed a basic 2-page Project Information worksheet, with the help of several contractors over the years; it summarizes important aspects of a particular job and keeps essential information handy, it’s also a great thing to give to your key office staff. When you are working on multiple projects, you do not want to have to stop to re-read a lengthy contract in orer to find a single piece of information.
The simple practice of recording important detailed information for each contract will make everyone’s life easier when you need to complete progress requisitions and/or make collection calls.
Our Project/Contract Information Worksheet, is a Word document, which you can download and customize to meet your own needs. Click here to download it now!
Change Orders are a fact of life that a contractor must deal with on just about every construction project that they are involved with.
Construction contracts start with an original bid amount for specific cost codes, phases of work, or line items. However, most construction contracts change as work proceeds; resulting in both increases and decreases or positive and negative change orders – which affect the original bid amount.
There are many ways in which people will handle Change Orders when using QuickBooks, such as just going to the original Estimate and changing the dollar amounts of the affected items. This is a “quick and easy fix”; however, it doesn’t leave a good documentation trail for what occurred on the project and can cause a lot of confusion.
Handling change orders that increase the value of the contract can be accomplished by:
- Editing the original Estimate and ADDING lines to the bottom indicating the cost codes and dollar amounts that are causing the increase.
- Creating a Sub-Job of the Job called Change Order 1 (2, 3, 4, ect.) and creating an estimate at the Sub-Job level to track just the cost codes involved in the change order.
Dealing with Negative Change Orders that reduce the original bid amount, is a bit more difficult – because QuickBooks will not allow you to create a Negative Invoice.
When you receive a negative change order that is LESS than the remaining balance on the contract, it’s a fairly easy process.
- Go to your QuickBooks Estimate, add a Change Order Item with no dollar amount – this provides a clear separation of the Original Contract amount.
- Below that add the Item that represents the reduction to the contract, enter the value as a negative amount, complete with the MINUS sign.
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When you are ready to prepare your next progress invoice:
- Bill the negative amount at 100%.
- Reduce the corresponding line item in the original contract section.
- Bill for any other line items that you need to.
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Or simply generate a zero dollar invoice to record the reduction.
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This method allows for a good documentation trail that everyone involved can easily see.
News from the National Association of Government Contractors
SBA officials announced on Oct. 4 that the agency is setting up procedures to help woman-owned small businesses gain more access to the federal contracting marketplace. A final rule is forthcoming in the Federal Register.
Working with the Federal Acquisition Regulatory Council, SBA officials will begin a four-month implementation of the Women-Owned Small Business program. They will be building infrastructure to support the certification process and allowing for ongoing oversight.
Officials say that by early 2011 contracts will begin to become available to small businesses owned by women under the program. Such an initiative has been promised for years to bolster access to women-owned businesses who have been an historically under-represented segment of the government contracting community.
The proposed rule states that the purpose “is to enable contracting officers to identify and establish a sheltered market for competition.”
Under an amended statute, contracting officers can set aside a portion of contracts for women business owners without first giving preference to other types of business.
In SBA’s rule, officials identified over 80 industries in which women would be eligible for federal contract assistance under the new program.
To formulate this list SBA officials used the analysis in a 2007 study commissioned by SBA from the Kauffman-Rand Foundation to identify industries where women are underrepresented.
Every contractor, regardless of their business structure (sole proprietor, partnership, corporation) has to choose an overall method of accounting; before the first federal tax return is filed. Accounting methods include:
the cash method- the accrual method
- the accrual method which excludes retentions, and (possibly)
- a hybrid method(s)
Depending on the type, size, and length of the construction contract, there are various methods of accounting for long-term construction projects that are allowed – each method has its own advantages and disadvantages.
A contractor will need to select a specific long-term contract accounting methods – possibly with different methods for it’s exempt and non-exempt contracts – and also selects sub-treatments for the classification of contracts and the allocation of indirect costs.
In a nutshell, accounting for long-term contracts relates to the treatment method that is chosen; or that is required by the rules and regulations of the tax code, in order to account for income and cost recognition for long-term contracts.
10+ Methods of Accounting for Construction Contracts
| Method | Revenue Recognition | Cost Recognition |
|---|---|---|
| Cash | As payment is received | As expenses are paid, except for depreciation and capitalization rules. |
| Hybrid – (Part Cash/Part Accrual | Cash or accrual – depending upon the method selected | Could be cash or accrual. For example, the contractor could use the cash method for receipts and disbursements AND accrual for inventory and payables related to inventory. |
| Accrual | As billing invoices are issued | Based on economic performance regulations of §461(h) |
| Accrual Excluding Retention | Based on when billing invoices are issued OR billings minus retainage deferred under the contract. Recognition of retainages, once entitled to receive |
Based on economic performance regulations of §461(h) |
| Completed-Contract (CCM) | Billings or total contract price once contract is finished and accepted. See 1.460-4(d) for revenue recognition for disputed contracts |
Costs are deferred as incurred. Specific costs are outlined in 1.460-5(d). Once completed, costs are closed out to expense.SG&A costs are expensed as incurred.
See 1.460-4(d) for expense recognition for disputed contracts. |
| Exempt Percentage-of-Completion (EPCM) | Contract price (including change orders) multiplied by percent complete.Percent complete determined by various alternative methods, such as:
|
Based on economic performance regulations of §461(h).Costs determined by 1.460-5(d).
All costs are expensed as incurred. |
| IRC §460(b)Percentage-of-Completion Method (PCM) | Revenues determined by only the cost-to-cost formula | Based on economic performance regulations of §461(h).Costs determined by 1.460-5(b).
All costs are expensed as incurred. |
| IRC §460(b)(3) Simplified Cost-to-Cost Method | Same formula as §460(b), except costs determined as outlined by §460(b)(4) or 1.460-5(c) | Based on economic performance regulations of §461(h).Job costs are direct material, direct labor and depreciation, amortization, and cost recovery on equipment directly used.
All costs are expensed as incurred. |
| Reg. 1.460-4(e), §460(a) Percentage-of-Completion/Capitalized-Cost Method (PCCM) | Use PCM formula as §460(b) with same type of costs for 70%, and use exempt contract method for the remaining 30%. | For 70%, same as the §460 PCM method, the balance of the contract is accounted for by the exempt-contract method. |
| IRC §460 10% Deferral Method | Same as §460(b) above, except that revenues and billings on all contracts with less than 10% complete, determined by the cost-to-cost formula, are deferred until greater than 10% complete. | Based on economic performance regulations of §461(h).All costs are expensed as incurred.
All costs on contracts less the 10% complete are not expensed as incurred, but rather are deferred in an account similar to an inventory account |
