How do small home builders handle costs?

[Unregistered]

How does a small home builder handle costs? If they are a cash-basis taxpayer, are the construction costs of a new spec home deducted as paid, or must they be capitalized and deducted when the home is sold?

[geekgirldany]

I've got several builders that build homes. What I do is the expenses for the each house is put into inventory until sold. You can't deduct the expenses until the house is sold. I carryforward the costs until the house is sold. I do still do 1099 though on each subcontractor for the year the work was paid.

[Safire]

Me too.

On spec houses, expenses are placed into inventory at end of year unless the house has been closed on.

If it is a contract house, then I take construction draws as income against current expenses.

[Bees Knees]

Even if a taxpayer is under the cash method of accounting, expenses for items that would normally be reported as inventory are not deductible until the inventory item is sold, or the item is paid for, whichever is later (TTB page 8-13).

[gman]

What If

What If The Contractor Is Getting Paid Over The Course Of The
Building Of The Home.

You Have A Lot Of Income--are You Aloud To Take Expenses At This
Time??

[Safire]

Gman, on my builders, if they have a contract with the home buyer and they are taking construction "draws", then I count all expenses for that home in that year against the income from that house in that year.

The only time I inventory is when it is a spec house, that has no contract.

[Matt Sova]

Draws on construction

The draws are not income and the amounts spent are not expenses until the closing under the completed contract method of accounting.

The amounts paid are inventory and the draws received are a liability called Deferred Revenue.

Matt

[Gretel]

Matt

Why wouldn't you use the percentage-of-completion method of accounting for this type of construction?

My client does the same thing spec and contracts and they have a budget, so they know pretty much the total costs of the project. I think the percentage-of-completion method is appropriate.

What are your reasons not to use it?

[Unregistered]

I am facing the same issue

TTB page 8-21 says that home construction contractors are not subject to the percentage of completion method. My builder takes construction loans through a bank affiliated with his supply yard. He pays for the expenses related to building the house and then takes draws on the construction loan as certain parts of the project are completed. Are the draws included in income prior to closing on the house? Are the expenses paid out expensable prior to closing? I would think no on both counts, as the last preparer did it this way (disbarred CPA!), but I want some other opinions.

[Unregistered]

Spec and Custom houses

All expenses paid out during the year are put on Sch C.
1099's are issued to sub contractors for monies paid during year.
All expenses for SPEC houses(including 1099's) are put in inventory until SOLD.
All expenses for Custom(houses under contract with owners) are taken the year paid.
Contractors do not do a closing on Custom houses Owners do.
All DRAWS taken for the Custon houses are income.

[Unregistered]

SPEC houses

I assume SPEC means speculative?
Where do the draws for these houses get reported and when (when drawn or when house is sold)?
Just seems strange that a builder would have to include in income monies received from the loan and have no deductions to take if the house were still in inventory.

Thanks in advance!

[Unregistered]

Loan is not income

If the monies to build the Spec house is a loan to the builder it is not income. Therefore
the expenses are not taken(put in inventory) until Spec is sold.
Another situation would be that the builder has his on monies to build Spec therefore no loan no income until sold.
Where are the draws coming from( a loan)???

[JON]

Home Builders_SMALL

They are given an exception to the general rules to be on the "completed contract" method. Why-to make life easier. If you want to make life hard for yourself you can go % of completion, but make sure you are reconizing the profit as you are completing-not as you are drawing on a construction loan...

[Unregistered]

draws are from construction loan

yes, the draws are coming from a construction loan.
so, on the balance sheet the builder would show an asset in the amount of the loan and a liability in the amount of the note.
the expenses would be taken at closing, when the income is "earned".

Do I have this right?

[Unregistered]

Spec or Custom

Is this a Spec or a Custom for a homeowner.
If a Spec the income is not reported until he sells it(whenever).
If its a Custom for a customer. The income is reported when received as a draw.