Discussion:Inc Tax on Government Contracts
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> Inc Tax on Government Contracts
Discussion Forum Index --> Tax Questions --> Inc Tax on Government Contracts
| 5 September 2009 | |
| I have a client who deals exclusivly with the US government. He basically designs widgets that the government buys.
We use the completed contract method to keep track of the inc/exp on each contract since they span over a few years. The question I have is does he need to pay income tax on the profit he makes on each contract? Something tells me that since he is working with the US government, the profit is not taxable income. He is only taxed on the salary he takes each year. To make matter worse it is a Sch C business | |
| September 5, 2009 | |
| First, what do you mean Sch C business and 'salary'. You can't be your own "employee".
Second, seems to me Haliburton (sp) contracts with the Federal government. I don't believe they are tax-exempt.... | |
Fr. Mackelhenry (talk|edits) said: | 5 September 2009 |
| Following on what Belle said...whew! That's a good one, Cody. Uh, what's an MBT? Is this income so secret he can't report it on his return? I'd ask for more details, but I'm afraid we'd have to classify the whole site. | |
| 5 September 2009 | |
| OK...for book purposes he is allowed a salary. Since he works on the contracts he needs to be paid a salary. On the Sch C the salary in not deducted. I understand how a sole prop works...my question relates to any tax law or special tax rules that relate to contractors that work with the united states government.
We have been reporting the income on the tax return on the completed contract method, however now the client is claiming he doesnt need to pay income tax on the profit he makes since they are contracts with the US government. An MBT is a Masters in Taxation.. | |
Death&Taxes (talk|edits) said: | 5 September 2009 |
| Sounds like he has been listening to Jerry Koosman too much. If his belief is such, maybe he could cut his price by the taxes he doesn't have to pay and thus help cut the budget deficit. | |
| 5 September 2009 | |
| Cody, your client cannot use the completed contarct method for tax purposes, becuase he "designs" widgets rather than "constructs" widgets. The completed contract method can only be used by manufacturers and comstruction contractors.
Your client has to use either the basic cash or accrual method of accounting, for tax purposes. Nevertheless, your client has to pay income tax on profits ... even if those profits are derived from fees received from the government. | |
| 5 September 2009 | |
| Cody, I don't know if your client is an engineer or not. But in my experience, even though engineers and doctors have good minds (in general), when it comes to tax law, they revert back to the days of the four humors, a flat earth, and the alchemist's retort. | |
| 8 September 2009 | |
| A sole proprietor does not pay himself a salary. The Schedule C profits are fully taxable. You need to consider some continuing education. | |
| 8 September 2009 | |
| [TAM 200903079]
Who issues the W-2 for the salary? TexCPA 11:03, 8 September 2009 (CDT) | |
| 8 September 2009 | |
| I understand how sole proprietorships work and no salary is deducted on Sch C. The salary that he is allocated is just a "book" entry. IRSFIXER...being an ex- PW guy I'm sure you have heard of thing called "Book vs Tax Differences".
The salary is not deducted for tax purposes, just for Book purposes... There is no W-2 issued...It is just an entry that is charged to each contract each year. Then we have a tax adjustment. Basically each contract has a tax cost and a book cost. The book cost has the salary assigned to it, but the tax doesn't. | |
| 8 September 2009 | |
| The IRS will most certainly look for income derived from the US gov't. | |
| 8 September 2009 | |
| I agree, but wanted to see what other people have thought. I'm dealing with a difficult client who only believes in his own rules..real fun... | |
| 8 September 2009 | |
| As someone who used to work as a controller and did tax work for a government contractor, you most certainly must pay taxes on the profits you make from a government contract.
Tom | |
| 8 September 2009 | |
| "Something tells me that since he is working with the US government, the profit is not taxable income."
Is this a book/tax difference? | |
PollyAdler (talk|edits) said: | 8 September 2009 |
| There's not much out there that's tax free Cody. Interest on Municipal bonds is tax free, but check your state tax.
Now, there is something where you can work in a war zone, I think, and a certain amount of your wages are tax free. I don't think this applies to egg-heads like the evil genius you are working for. He's not manufacturing on the battlefied is he? If you could manufacture for the government tax free, why would anyone sell to private persons? Take it from a working girl who has been around the block, there's no such thing as a free lunch (unless you're a Member of Congress or a doctor, their lunches are provided gratis by the pharmaceutical companies). | |
