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How to account for change orders
Last-minute changes to contracts can be frustrating. But, if managed properly, they can sometimes provide an opportunity to boost profits. Here are ways construction companies, engineering firms, software developers and other businesses that enter into long-term contracts with customers can better track change orders, account for them properly on their financial statements and use them to enhance the bottom line.
Common mistakes
Customers can sometimes change their minds after signing a contract, but before work is completed. To keep projects on schedule, it’s not unusual for contractors to begin out-of-scope work before a change order is approved. But failure to properly track and account for the costs and revenue associated with this work can have a negative impact on a business’s financial statements.
Suppose, for example, that a contractor records costs attributable to a change order in total incurred job costs to date, without making a corresponding adjustment to the total contract price and total estimated contract costs. To a lender or surety, this may indicate excessive underbillings.
On the other hand, profit fade can occur if contractors are overly optimistic about their chances of receiving change order revenue. If a contractor increases the total contract price based on out-of-scope work but is unable to secure change order approval, profits may fade as the job progresses. This can also shake the confidence of financial statement users.
3 categories
Without proper tracking procedures, contractors may inadvertently forget to charge customers for change orders in accordance with the terms of agreement. Change orders generally fall into these three categories:
1. Approved. For this category, it’s appropriate to adjust incurred costs, total estimated costs and the total contract price. Depending on the contract’s change-order provisions, this may increase the business’s estimated gross profits.
2. Unpriced. If the parties agree on the scope of work but leave negotiations on price for later, the accounting treatment depends on the probability that the contractor will recover its costs. If it’s not probable, change order costs are treated as costs of contract performance in the period during which they’re incurred, and the contract price is not adjusted. As a result, the contractor’s estimated gross profit decreases.
If it’s probable that the costs will be recovered through a contract price adjustment, the contractor can either:
- Defer the costs until the parties have agreed on the change in contract price, or
- Treat them as costs of contract performance in the period incurred and increase the contract price to the extent of the costs incurred (resulting in no change in estimated gross profit).
To determine whether recovery is probable, a contractor should consider its past experience in negotiating change orders and other factors. If it’s probable that the contract price will be increased by an amount that exceeds the costs incurred (increasing estimated gross profit), the contractor may recognize increased revenue — provided realization of that revenue is “assured beyond a reasonable doubt.”
3. Unapproved. These should be treated as claims. It’s appropriate to recognize additional contract revenue only if, under guidance provided in the accounting rules, it’s probable that a claim will generate such revenue and the amount can be reliably estimated.
We can help
Accounting for change orders under the percentage-of-completion method of accounting can sometimes be confusing. Contact us for help managing your company’s change order procedures and improving the accuracy and transparency of your financial statements.
© 2021
Checkpoint Marketing for Firms
THOMSON REUTERS
There’s a deduction for student loan interest … but do you qualify for it?
If you’re paying back college loans for yourself or your children, you may wonder if you can deduct the interest you pay on the loans. The answer is yes, subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. Unfortunately, the deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, and as explained below, the levels aren’t very high.
The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain postgraduate programs also qualify. Therefore, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital or health care facility offering postgraduate training can qualify.
It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.
Phase-out amounts
For 2021, the deduction is phased out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 ($70,000 and $85,000 for single filers). Thus, the deduction is unavailable for taxpayers with AGI of $170,000 ($85,000 for single filers) or more.
For 2022, the deduction will be phased out for taxpayers who are married filing jointly with AGI between $145,000 and $175,000 ($70,000 and $85,000 for single filers). That means the deduction is unavailable for taxpayers with AGI of $175,000 ($85,000 for single filers) or more.
Married taxpayers must file jointly to claim this deduction.
No deduction is allowed to a taxpayer who can be claimed as a dependent on another’s return. For example, let’s say parents are paying for the college education of a child whom the parents are claiming as a dependent on their tax return. The interest deduction is only available for interest the parent pays on a qualifying loan, not for any interest the child-student may pay on a loan he or she may have taken out. The child will be able to deduct interest that is paid in a later year when he or she is no longer a dependent.
The deduction is taken “above the line.” In other words, it’s subtracted from gross income to determine AGI. Thus, it’s available even to taxpayers who don’t itemize deductions.
Other requirements
The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his or her spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.
Taxpayers should keep records to verify qualifying expenditures. Documenting a tuition expense isn’t likely to pose a problem. However, care should be taken to document other qualifying education-related expenditures such as for books, equipment, fees and transportation.
Documenting room and board expenses should be straightforward for students living and dining on campus. Students who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.
We can help determine whether you qualify for this deduction or answer any questions you may have about it.
© 2021
Checkpoint Marketing for Firms
THOMSON REUTERS
2022 Q1 tax calendar: Key deadlines for businesses and other employers
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
January 17 (The usual deadline of January 15 is a Saturday)
- Pay the final installment of 2021 estimated tax.
- Farmers and fishermen: Pay estimated tax for 2021.
January 31
- File 2021 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
- Provide copies of 2021 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
- File 2021 Forms 1099-MISC, reporting nonemployee compensation payments in Box 7, with the IRS.
- File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2021. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
- File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2021. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
- File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2021 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 28
- File 2021 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)
March 15
- If a calendar-year partnership or S corporation, file or extend your 2021 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2021 contributions to pension and profit-sharing plans.
© 2021
Checkpoint Marketing for Firms
THOMSON REUTERS
Digitizing the accounts receivable process
While digitalization continues to take hold of the business world, the billing and collections functions for many organizations remain largely paper based. Businesses that automate the accounts receivable process may accomplish several operational and financial goals. Here are five key benefits that organizations can unlock when they “go digital.”
1. Manual processing is minimized; efficiency is maximized
Generating a paper invoice is a laborious process, especially when there’s a digital alternative. Instead of creating, printing and mailing an invoice, organizations can autogenerate electronic invoices and e-reminders for overdue payments.
This reduces the administrative burden considerably. Plus, e-billing saves on office supplies such as paper, envelopes and stamps.
2. The payment process is faster
Digitalization streamlines the cash conversion cycle. The accounting department doesn’t need to spend time mailing paper invoices and late notices. Instead, staff can be reassigned from administrative tasks to value-added ones, such as budgeting, forecasting and cash management.
On the flipside, customers that pay electronically — or set up an autopay option — don’t need to waste time cutting a check. Plus, the recipient of an e-invoice may be more likely to pay quickly to capture discounts or merely remove the payment from their to-do list.
3. Customers can use their preferred payment method
Instead of forcing customers to issue paper checks, they can make payments using digital payment options, including credit cards, ACH or wire transfers. Businesses that sell directly to consumers may also accept payment via PayPal, Venmo or other digital payment apps. These alternatives may incur lower fees than those charged by credit card companies.
4. Customer loyalty may grow
Organizations that facilitate digital payment are easier to do business with. Reducing customers’ administrative burdens can, in turn, increase customer loyalty. It can also remove the potential for conflict that may result when payments go missing or arrive late.
5. The potential for fraud decreases
Paper checks may be susceptible to fraud. Digitalization removes the need to store and mail paper checks, mitigating the potential for employee fraud. And because there’s no longer a need to mail checks, it prevents the interception of checks by a third party.
We can help
Contact us for help digitalizing your accounts receivable process. We can also help train your staff to transition to more strategic roles in your company.
© 2021
Checkpoint Marketing for Firms
THOMSON REUTERS
The 401(k) contribution limit will increase in 2022
The IRS recently announced that the amount individuals can contribute to their 401(k) plans will increase in 2022. The tax agency has also announced other cost‑of‑living adjustments affecting dollar limitations for pension plans and retirement-related items for tax year 2022. Let’s look at some highlights.
Rising limit
First and foremost, the contribution limit for employees who participate in 401(k), 403(b) and most 457 plans, as well as the federal government’s Thrift Savings Plan, will increase to $20,500. That’s up from $19,500 in 2020 and 2021.
The catch-up contribution limit for employees age 50 and over who participate in the plans mentioned remains unchanged at $6,500. Therefore, participants in the plans mentioned who are 50 and older can contribute up to $27,000, starting in 2022.
The amount individuals can contribute to their Savings Incentive Match Plans for Employees (SIMPLEs) will increase from $13,500 to $14,000. The catch-up contribution limit for employees age 50 and over who participate in SIMPLEs will stay $3,000.
IRA phaseouts
The limit on annual contributions to an IRA will remain unchanged at $6,000 next year. The IRA catch-up contribution limit for individuals age 50 and over isn’t subject to an annual cost-of-living adjustment, so it will remain $1,000. However, the income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs will increase for 2022.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. However, if either the taxpayer or the taxpayer’s spouse was covered by an employer’s retirement plan during the year, the deduction may be reduced (phased out) or eliminated. If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phaseouts of the deduction don’t apply. Here are the phaseout ranges for 2022:
- For single taxpayers covered by an employer’s retirement plan, the range will increase to $68,000 to $78,000, up from $66,000 to $76,000.
- For married couples filing jointly, if the spouse making the IRA contribution is covered by an employer’s retirement plan, the range will increase to $109,000 to $129,000, up from $105,000 to $125,000.
- For an IRA contributor who’s not covered by an employer’s retirement plan and is married to someone who is covered, the range will increase to $204,000 to $214,000, up from $198,000 to $208,000.
- For a married individual filing a separate return who’s covered by an employer’s retirement plan, the range isn’t subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The range for taxpayers making contributions to a Roth IRA will increase to $129,000 to $144,000 for singles and heads of household, up from $125,000 to $140,000. For married couples filing jointly, the range rises to $204,000 to $214,000, up from $198,000 to $208,000. And the range for a married individual filing separately who contributes to a Roth IRA isn’t subject to an annual cost-of-living adjustment. It remains $0 to $10,000.
That’s what’s up
Employers can encourage participation in their plans and help their employees save for retirement by communicating contribution limit changes every year. Make sure your workers know what’s up. And for more information on the tax impact of a retirement plan you’re either administering or considering, please contact us.
© 2021
Checkpoint Marketing for Firms
THOMSON REUTERS
