Contractor License Practice Exam

Many times a contract cannot be completed in one taxable year. The Tax Reform Act of 1986 allows the use of which accounting methods for estimating income?

1. Completed Contract Method

2. Cost Comparison Method

3. Percentage of Completion Method

4. All of the above

The correct answer is: All of the above

The Tax Reform Act of 1986 provides flexibility for contractors regarding the accounting methods they can use to estimate income for contracts that span more than one taxable year. The act recognizes that contracts are often long-term and that estimating income fairly is essential for tax purposes. The Completed Contract Method allows for income and expenses to be recognized only when the contract is finished, meaning no income is reported until the project is complete. This method can be advantageous for contractors who want to avoid recognizing income before their work is fully completed. The Percentage of Completion Method allows contractors to recognize income based on the percentage of the project that has been completed in a given year. This method provides a more immediate reflection of a contractor's income and can be beneficial for cash flow management since it enables contractors to report income regularly as work progresses. The Cost Comparison Method, while less common, may also be used in specific scenarios to report income based on costs incurred versus the total expected costs of the contract. The allowance of all these methods under the Tax Reform Act of 1986 gives contractors options tailored to their financial strategies and the nature of their contracts. This flexibility can lead to more accurate income reporting and potential tax advantages. Therefore, the answer indicates that all these accounting methods are permissible to estimate