Construction Accounting Basics For Construction Contractors
Construction Accounting is not a natural mindset for Construction Contractors. Construction Accounting has own language. Regular Accounting the language is Income Minus Expenses Equals Net Profit.
Construction Accounting is Income Minus Cost of Goods Minus Overhead Equals Net Profit. That simple little thing called Cost of Goods Sold is the primary difference between Regular Accounting and Construction Accounting.
Understanding that difference and how it relates to Job Costing and Job Profitability can get contractors like you firmly on the road to financial freedom.
Then comes Construction Accounting.
- Income is added up to have Total Income.
- Cost of Goods Sold included more than the cost of material.
- Total Income less Total of Cost of Goods Sold equals Gross Profit.
- Expenses include a variety of overhead related items.
- Gross Profit less Total Expenses equals Net Ordinary Income.
- Net Ordinary Income Plus Other Income and Less Other Expenses equals Net Income.
Financial Reports have a lot of information on them. Your tax accountant will calculate the depreciation.
When a contractor purchases a small tool, and it is an expense. What determines whether a tool is an asset or expense is the cost of the tool (not its size of the tool or piece of equipment)
Any tool or equipment that costs less than Five Hundred Dollars is considered an expense.
The Internal Revenue Service expects that it will last less than one year and not repairable or the cost of purchasing a new tool will be less than the cost to repair it most of the time it is not feasible to repair.
These days it is hard to find anyone who can do repairs on small tools. The neighborhood hardware store is usually a True Value Hardware or Ace Hardware. I can only think of a few larger Hardware Store that might send the tool out for repairs. Smaller communities may have repairs as a common option.
As a contractor you may purchase a tiny tool (in size) but huge in price meaning it cost over Five Hundred Dollars. These type of tools need to be depreciated. Congress approves an accelerated depreciation (Section 179) where most items can be depreciated at a 100% in a single year.
This benefits small contractors as the annual threshold is usually higher than they spend on tools and equipment. Each of these larger tools needs to be listed in the Accounting Software (we use QuickBooks Desktop In the Cloud) and we can setup QuickBooks for Contractors in a way that makes it fast and easy for the day to day contractor bookkeeping to get done.
Why – Because the Tax Accountant decides on what can group and which tools and equipment need to be itemized individually. The rules differ depending on the item on how much can be depreciated on a single line and which items may have internal caps.
Short Answer - In other words, How many lines and How many pages does it take to get to 100%. If taking all of the depreciation available does not make sense to take it a single year the Tax Accountant may decide to use traditional depreciation rules. Using the thought that if taking 100% of the available depreciation doesn’t help you – don’t waste the depreciation deduction. Spread it out over several years.
What is Cost of Goods Sold In Construction Accounting?
Contractors often ask us can they buy our Chart of Accounts with Cost of Goods Sold and import them into their QuickBooks Desktop file or their QuickBooks Online file. The answer is yes!
Click Here for QuickBooks Desktop Chart of Accounts With Cost of Goods Sold
Click Here for QuickBooks Online Chart of Accounts With Cost of Goods Sold
Direct Costs are tied to the jobs (field labor, material, and other cost items) Office material (pencils, paper, toner, etc. are overhead) Yes, an Accountant could say these many pencils are used in the field, and that notepad is used in the truck.
The answer is the dividing line of what the DIRECT COSTS to the job and those are Cost of goods sold (COGS).
Confusion always comes about the material. A Construction Contractor may purchase material and resell it to their customer at cost. Thereby thinking it is a reimbursable expense. (Lose money when doing this).
Remember all invoices to the Customer (Retail, General Contractor, Spec Builder, Developer) is income. Washington State has a clear explanation. If the words are on the invoice, then the invoice is either taxable or non-taxable based on other factors. Every line item on a customer invoice is All INCOME.
Purchases for the material are Cost Of Goods Sold or are expenses if you are shortcutting your accounting. I have seen financial statements that are backed out because they will reflect reimbursable income as a negative number and thereby show it as a deduction. (Net effect is double dipping on the expense side) The cause is the accounting software not properly set up. We fix bad QuickBooks Setup For Construction Contractors.
New Construction Home Building is another area of confusion.
In the mind of many Construction Contractors, a Spec home is any new house that is being built for resale. That is true; it is a New Construction House. The question is on the Construction Accounting side. For the Owner and Developer (who might be the General Contractor running the job) it is a Spec Home.
For the General Contractor who is building a New Construction Home for a Developer, it is NOT a Spec Home. Why it might seem the same as both are New Construction Houses. Question to be answered is Who owns the house? It is a Spec House in the Accounting System for THE OWNER.
If the General Contractor Does Not Own the house then from an accounting side for that specific General Contractor, the house is a Custom Home who has an owner who is Not The General Contractor.
If the General Contractor, Developer who Owns the new House being built then it is a Spec House in the Accounting System. All costs roll up into WIP and covert to COGS when the house is sold not before. Recognize expenses when the house sells. Otherwise, expenses one year; sale the next equals TAXES.
In Washington State, all Construction Contractors working for a Spec Builder need to collect sales tax on all services (labor and material) when billed from the General and Trade Construction Contractors.
In Washington State, all Construction Contractors working on a Custom Home, Residential or Commercial Projects, Large or Small Remodels, Handyman Projects can accept reseller permit from the General Contractor. Sales Tax is billed and collected from the Owner by the General Contractor.
In Washington State, Contractors need to collect sales tax on all retail project including Labor, Material, Other. Sales tax must be collected on every line item. Customer Discounts can be given for any reason.
One quick word about hiring subcontractors. Make sure they are licensed and bonded based on the rules of your state. Review and make sure you are not their only customer. As Construction Contractor, you Do Not Want for any Government Agency (State or Federal) to re-classify them as your employee. Government Agencies share names, and there are Payroll taxes for everyone.
Part of rules, a 1099 Contractor must work for more than one person or company. Get a signed W-9. Internal Revenue wants to have 1099’s issued for everyone who received over six hundred dollars in a single calendar year.
If you have employees, Use a payroll service that will electronically file Quarterly and Annual Returns. Many will also file the 1099’s. Keep your reporting simple and easy. Easier to prove you filed on time. Having an outside Construction Accountant makes meeting the rules as a contractor versus an employee easier.
Fast Easy Accounting does the bookkeeping, accounting, payroll and offers business coaching for small, brand new Construction Contractors who are General Contractors, Trade Contractors, and Handyman all across the USA including Alaska and Hawaii. Do the parts that only you can do; leave the rest to us.
You are never too small for us to help and we can help beginning with your first day in business.
Looking forward to being of assistance.
Trick Or Treat – Happy Halloween
See you at the Mall – Our Fun Place to watch all the kids from newborns to over xxx (shhh I can’t count that high) filled with the Kids At Heart dressed up in cute, funny costumes. Food Court has the best view. It is one of the few days everyone gets to have fun no matter how old they are the rest of the year.
Enjoy your day.
About The Author:
Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. http://www.fasteasyaccounting.com/sharie-dehart/ 206-361-3950 or sharie@fasteasyaccounting.com
When You Become A Client - Then we can tap into our resources of knowledge and strategy banks. We use the reports hidden in your QuickBooks in order to diagnose and understand your construction business and develop plans and help you implement a path to success for you and you alone because every contractor has unique Strengths, Weaknesses, Opportunities and Threats (S.W.O.T. Analysis) that when understood can lead to a Strategic Roadmap which cannot help but make a lot of money.
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This Is One More Example of how Fast Easy Accounting is helping construction company owners all across the USA including Alaska and Hawaii put more money in the bank to operate and grow your construction company. Construction accounting is not rocket science; it is a lot harder than that, and a lot more valuable to people like you so stop missing out! Call Sharie 206-361-3950 or sharie@fasteasyaccounting.com and schedule your no charge one-hour consultation.
Profitable Contractors and Construction Company owners have known about the value of outsourced bookkeeping services and contractor coaching services like ours for a long time, and now you know about it too!
Thank You For Reading This Far, And I Hope You Understand we really do care about you and all contractors regardless of whether or not you ever hire our services.
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