A developer whose taxation year ends On December 31, he owns 5,000 hectares of undeveloped land. In order to obtain permission from the local county government to improve this land, a service road must be built on this land that will benefit the entire 5,000 hectares. In 2000, the developer entered into a contract to sell 1,000 hectares of undeveloped land to a residential developer at fair market value. In this “sales contract”, the developer agrees to build a service road that crosses the land he sells to the residential developer. The construction of the economic road is expected to be completed in 2002. The “sales contract” is a construction contract because the construction of an object (the service road) is necessary for the developer to fulfill his contractual obligations. De minimis construction activities must also be taken into account in the market classification if they are carried out after 10 September. January 2001. The term “long-term” tends to refer to a contract that has a long duration, but the duration of the contract is not relevant to be classified as a long-term construction contract.
Article 460(f)(1) of the IRC generally defines a long-term contract as a contract that has not yet been concluded at the end of the tax year. An architectural firm enters into a contract with a client for the planning of an office building. Since the contract is for the provision of services, it is not a long-term construction contract. However, if the construction company affiliated with the architect enters into a contract with the same client for the construction of the “designed” building and the construction company is required to take into account the long-term construction contract under the ECHP, the architect must take into account the design services under the ECHP, because the services are linked to the contract of the related construction company. General and administrative (G&A) expenses are the costs incurred for the management of the company and cannot be allocated to a specific job. Labour costs are the direct costs of a particular job grouped into 2 categories: direct labour costs are those that can be allocated to a particular job; Indirect order costs are costs that are incurred during the execution of the contract, but which cannot be assigned to a specific order, e.B. Utilities, maintenance of repairs for appliances and equipment, and tools and equipment. The difference between indirect labour costs and general and administrative costs is that indirect labour costs directly affect more than one job, while administrative costs would be incurred even if the entrepreneur did not have specific jobs. In addition, the performance of a warranty, guarantee or maintenance contract is a non-long-term contractual activity that is never necessary for the manufacture or construction of real estate under a long-term contract.
There are a few exceptions to this long-term accounting rule. It does not apply, for example, to contracts for the construction of houses started after 1988. It also does not apply to small works contracts, which fall under exceptions for small contractors and additional laws passed for small contractors below a certain level of income in order to grant them tax benefits. The exceptions in section 1.460-1(e)(3) of the Treasury Regulations provide that (i) a taxpayer may not terminate a long-term contract that would be subject to PCM under this paragraph (e) without the prior written consent of the Commissioner. First of all, what is a long-term contract? A long-term construction contract is any contract written for the purpose of manufacturing, building, installing or constructing a property that covers more than one tax year. In other words, if a taxpayer starts a construction contract on December 31 of the calendar year and ends it on January 1, the contract is considered “long-term” because it spans two taxation years. A long-term contract is generally any contract for the manufacture, construction, installation or construction of real estate if the contract is not concluded during the contract year as defined in Article 1.460-1(b)(5) of the Regulations. However, a contract for the manufacture of real estate is a long-term contract only if it also meets the requirements of a single section described in section 1.460-2 or a 12-month contract.
A contract for the production of personal property is a manufacturing contract. On the other hand, a contract for the construction, installation or construction of real estate is a construction contract. See section 1.460-1(b)(1) of the Treasury Regulations. The methods of accounting for long-term contracts apply only to gross revenues and costs resulting from long-term contracting activities. Non-long-term contracting activities are defined in section 1.460-1(d)(2) of the Treasury Regulations. This situation illustrates the concept of severance pay. On January 1, 2005, a contractor entered into an agreement for the construction of two office buildings in different areas of a major city. The agreement stipulates that the two office buildings will be completed in 2006 and 2007 respectively and accepted by the client. The contractor will receive $1 million and $1.5 million, respectively, for the two office buildings.
With the exception of home construction contracts, large contractors must use the percentage of completion method for long-term contracts. PcM must also be used to determine liabilities under the Alternative Minimum Taxation (AMT) regime. Under the ECHP, the progress of the project is determined by the total costs actually incurred in relation to the estimated total costs. Therefore, the turnover of a given year is determined by the actual contractual costs incurred for that year divided by the estimated total cost multiplied by the total contract price: a general contractor is responsible for designing and constructing a building for a customer. The design part of the contract is considered a non-long-term contractual activity. However, it is secondary to the construction of the building, since it could not be built without the design, so the entire contract is settled under long-term contractual accounting. .