Oct 27, 2017
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.
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.
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 like QuickBooks is 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:
https://www.fasteasyaccounting.com/free-one-hour-consultation-bookkeeping
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
I trust this podcast helps you understand that outsourcing your contractor's bookkeeping services to us is about more than just “doing the bookkeeping”; it is about taking a holistic approach to your entire construction company and helping support you as a contractor and as a person.
We understand the good, bad and the ugly about owning and operating construction companies because we have had several of them and we sincerely care about you and your construction company!
That is all I have for now, and if you have listened to this far please do me the honor of commenting and rating the Podcast www.FastEasyAccounting.com/podcast Tell me what you liked, did not like, tell it as you see it because your feedback is crucial and I thank you in advance.
I trust this will be of value to you and your feedback is always welcome at www.FastEasyAccounting.com/podcast
This Is One more example of how Fast Easy Accounting is helping construction company owners 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 construction contractors like you so stop missing out and call Sharie 206-361-3950 or email sharie@fasteasyaccounting.com
Thinking About Outsourcing Your Contractors Bookkeeping Services?
Click On The Link Below:
This guide will help you learn what to look for in outsourced construction accounting.
Need Help Now?
Call Sharie 206-361-3950
Thank you very much, and I hope you understand we do care about
you and all contractors regardless of whether or not you ever hire
our services.
Bye for now until our next episode here on the Contractors Success
MAP Podcast.
Enjoy your day.
Sharie
About The
Author:
https://www.fasteasyaccounting.com/free-one-hour-consultation-bookkeeping
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
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