Tax Policy

In response to a congressional request, GAO developed and analyzed data on the extent to which manufacturing and construction contractors use the completed contract method to defer federal taxes to determine whether continued use of the method is justified.

Contractors have justified the use of the completed contract method of accounting on the basis that, due to inherent uncertainties in their trade, the profitability of individual projects is uncertain before completion. GAO examined the 1980 to 1984 annual reports of 135 contractors identified as users of the completed contract method for tax purposes and found that: (1) 20 federal contractors accounted for approximately $4.36 billion in deferrals or 84 percent of all deferrals by using the method; (2) the American Institute of Certified Public Accountants prefers that contractors use the percentage-of-completion method for financial reporting when they can make reasonably dependable cost estimates; and (3) 103 of the surveyed contractors used the percentage-of-completion method to estimate annual revenues and costs attributable to long-term contracts. Internal Revenue Service (IRS) officials' commented that: (1) they had no more problems examining and auditing taxpayers who use the percentage-of-completion method than they do with those using the completed contract method; (2) there is no reason why the estimates contractors use on long-term contracts for financial reporting purposes could not also be used for tax accounting purposes; (3) the percentage-of-completion method is the better method for recognizing annual income; and (4) eliminating use of the completed contract method might simplify IRS administrative functions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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