Retainage payable: A simple change can defer taxes

Description

Abstract: Contractors who withhold retainages from subcontractors may be able to defer some of their taxable income to future years. This opportunity stems from the way retainage payable is treated under the percentage-of-completion method (PCM) of accounting. As this article explains, large contractors generally use the PCM to report income on long-term contracts, using a “completion factor” formula to calculate taxable profits for the year. But, in certain circumstances, retainage can be excluded from this factor. A sidebar offers an example of how this works.