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.
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.
The answer is the dividing line of what the DIRECT COSTS to the job and those are Cost of goods sold (COGS).
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.
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:
#2 Asked Their Tax Accountant To Setup QuickBooks
#3 They Attended A How To Setup QuickBooks Class Or Seminar