Retention Receivables

[geekgirldany]

I have a new customer that is in the construction business. He uses an account called Retention Receivables. I believe I understand what is going on. He is giving the customer a 10% discount and retaining that amount to be billed at the end of the job.

My question is why is this done in the construction industry? Just trying to understand as I have never seen this before.

Thank you

[ChEAr$]

retention

I have a new customer that is in the construction business. He uses an account called Retention Receivables. I believe I understand what is going on. He is giving the customer a 10% discount and retaining that amount to be billed at the end of the job.

My question is why is this done in the construction industry? Just trying to understand as I have never seen this before.

Thank you

Certain contracts usually provide for this rentention. It is not a discount atall, but an
amount retained, or withheld until satisfactory completion of the job and everything signed
off by those with responsibility.

A customer of this type is probably using percentage of completion anyway, so income
is measure under that scheme.

[BHoffman]

Construction tax is verrrry tricky

You might want to order PPC "Construction Contractor Taxation", Dany. Construction tax has a lot of strange rules. For instance and without into very much detail, retention receivables less retention payables can be backed out of income until received/paid for some taxpayers who don't report on the cash basis. There are different reporting rules for large vs. small contractors, and commercial vs. home construction contracts. There are different recognition methods - cash, accrual, percentage of completion, completed contract. There is the Domestic Production Activities Deduction to calculate. There are cost allocation rules. There are also requirements, in some instances, where you have to calculate and report look-back interest.

Whew!

[geekgirldany]

Whew is right

Thank you guys for posting. This fellow is in commercial masonry. QuickBooks is thankfully setup correctly. He has been doing a Retention item which is conntected to a Retention Receivable "other asset" account. He does 10% on the original invoice as a discount then bills them later for the 10% using the same item. So it clears out the Retention Receivable account.

This is causing things to look strange on the Balance Sheet though under Cash Basis. Both receivables are showing up as positive amounts. I believe the Rentation item being attahced to another balance sheet account can cause the receivables to show like this.

I'll look into that PPC book. I really try not to take on large construction businesses. I try to stay with smaller ones.

[BHoffman]

Me too. The tax returns are hard to do and they never want to pay the fee for the time it takes.

[Snaggletooth]

Purpose

The real purpose of having the retainer is to serve as a guarantee.

Almost all forms of construction are high risk activities. A trades contractor, such as electrician, plumber, foundation, etc. typically has these retainers to mitigate the paying source in the event something goes wrong. Any of the above contractors can screw up either by substandard materials, out-of-specification materials, substandard workmanship, or ill-timing (perhaps the biggest problem of all).

One of the most common occurrences which happens when there is no retainer is a situation where a contractor substantially completes his work but leaves just a little tad left which can be finished in only a few hours. (Example: A paving contractor gets all his paving done but does not come back to stripe the white lines. Striping the lines may be only $200 of a $30,000 subcontract)

A subcontract for $40,000 with a 10% retainer means that $36,000 is paid over the course of the subcontract and $4000 is paid later, usually after the entire project is completed. Any such contractor is REQUIRED to use percentage-of-completion revenue recognition if their jobs last more than one year. Delaying the $4000 does not stop it from being recognized under the percentage-of-completion method, but if the $4000 is subject to chargebacks, it may be eliminated from the estimate-at-completion formula.

[S T]

Large vs Small

Curious, what would be a large vs small commercial contractors on retention?

Anyone have any guidelines?

Sandy

[BHoffman]

Hi Sandy - I'm not sure about retention. If you're wondering about the requirements for percentage of completion reporting, then the guidelines are:

Small (commercial) contractors are exempt from reporting on the percentage of completion basis if:

Contract is for construction and

Contract is expected to be complete within 2 years of contract commencement date and

Taxpayer's average gross is under $10m for preceding 3 years.

See IRC Sec 460 and Treas Reg 1.460 if you want to research it.

I think home construction contracts are exempt.