Tax Reporting Strategies
The percentage of completion and completed contract approaches mainly differ on the method of tax reporting. For completed contracts, incomes and expenses are recognized after the job is completed. Contractors can defer their taxes until the project is completed. However, this provides many risks since most countries are likely to amend their tax laws occasionally, which increases the company’s tax burden in the long run. Additionally, this method poses challenges to contractors who seek to attract other investors to their firm if they have no valid tax records in the first place. Despite this, completed contracts approach is the most preferred method in the industry.
Percentage of completion approach recognizes incomes and expenses in the year received. Consequently, tax calculations have to be made on the year received. This method is effective in combating tax fluctuations, making it the most preferred approach for long term contracts. However, in order to defer taxes in this approach, special permits have to be given by the tax agency. You may need to hire a licensed tax specialist for advice on how to defer taxes under this method.