Publication Date - May 2009

NOTE: This document is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Construction Industry Audit Technique Guide (ATG)

Table of Contents

Chapter 1: Introduction to the Construction Industry

• Intended Audience
• Participants in the Construction Industry
• The Contracting Process
• Contract Income
• Types of Contracts
• Bonding
• Building Permits
• Notice of Completion

Chapter 2: Long Term Contracts

• Background
• Long Term Contract Defined
• Contracts Subject to IRC Section 460
• Contracts Exempt from IRC Section 460
• Construction and Manufacturing Contracts
• Integral Components of Real Property
• Contract Classifications
• Hybrid Contracts
• De Minimis Construction Activities
• Non Long-term Contract Activities
• Related Party Contracts
• Severing and Aggregating Contracts
• Conclusion

Chapter 3: Small Construction Contractors

• Introduction
• Exceptions to Percentage of Completion Methods & Look-Back Interest
• Production Period Interest
• $10 Million Gross Receipts Test
• Proper Method of Accounting for Small Contractors
• General Rule of Accounting Methods
• Methods of Accounting
• Selecting an Accounting Method
• Cash Method of Accounting
• Accrual Method of Accounting
• Completed Contract Method (CCM)
• Completion of a Long-Term Contract
• Subcontracts and Completion
• Exempt-contract Percentage-of-Completion Method (EPCM)
• Alternative Minimum Tax (AMT)
• Small Contractors Becoming Large Contractors
• Pros and Cons of Long-Term Accounting Methods
• Conclusion

Chapter 4: Large Construction Contractors

• Introduction
• Methods of Accounting, Contracts subject to IRC Section 460
• Cost-to-Cost Method
• Allocable Contract Costs
• Impact of Cost Allocation on Percentage of Completion Computation
• Cost-Plus Contracts and Federal Long-Term Contracts
• Simplified Cost-to-Cost Method
• Percentage-of-Completion (10 Percent Method)
• Percentage-of-Completion/Capitalized-Cost Method (PCCM)
• Total Estimated Contract Price and Claim Income
• Additional Considerations for PCM
• Reversal of Income on Terminated Contract
• Conclusion

Chapter 5: Look-Back Interest

• Introduction
• Look-Back is Hypothetical
• Scope of Look-Back Method
• Exceptions from the Application of Look-Back
• Election Not to Apply Look-Back
• Computation of Look-Back
• Step 1: Reapply the PCM to all Long-Tterm Contracts
• Step 2: Computation of Overpayment or Underpayment of Tax
• Step 3: Calculation of Interest on Underpayment or Overpayment of Tax
• Simplified Marginal Impact Method (SMIM)
• Post-Completion Revenue and Expenses
• Revenue Acceleration Rules
• Reporting Look-Back, Form 8697
• Mid-Contract Change in Taxpayer and Look-back Interest
• Common Errors
• Conclusion

Chapter 6: Financial Accounting vs. Tax Accounting

• Introduction
• Financial Accounting
• Balance Sheet Reporting
• Sample Financial Statements using Percentage of Completion Method:
  • Balance Sheet
  • Statement of Income and Retained Earnings
  • Schedule 1 on Earnings from Contracts
  • Schedule 2 on Contracts Completed
  • Schedule 3 on Contracts in Progress

Chapter 7: Homebuilders and Developers

• Introduction
• Home Construction Contract Defined
• Taxation of Homebuilders
• Homes Built for Speculation (No Contract)
• Inventory vs. Real Estate
• Contractors Building Home Under Contract
• Land Developer
• Allocating Costs to Each Parcel of Property
• Conclusion

Chapter 8: Other Tax Issues in Construction

• Introduction
• Accounting Method Issues
• Income Issues
• Expense Issues
• Tax Issues
• Conclusion

Chapter 9: Income Probes

• Introduction
• Understanding the Accounting System
• Minimum Income Probes
• Internal Controls
• Use of Indirect Methods
• Miscellaneous Income Sources
• Conclusion

Chapter 10: Construction Joint Ventures

• Introduction
• Types of Joint Ventures
• Joint Venture Examinations
• Potential Joint Venture Issues
• Conclusion

Chapter 11: Contractor Square Foot Costs

• Introduction
• Division 1 - Site Work
• Division 2 - Foundations
• Division 3 - Framing
• Division 4 - Exterior Walls
• Division 5 - Roofing
• Division 6 - Interiors
• Division 7 - Specialties
• Division 8 - Mechanical
• Division 9 - Electrical
• Division 10 - Installing Contractor’s Overhead and Profit
• Audit Issues and Examination Techniques

Appendixes

• Applicable Federal Tax Law & Guidance
• Tax Methods of Accounting
• Construction Industry Resources
• Cost Allocation
• Definitions and Terminology
• Construction Industry Interview Questions