What impact does amt have on the decision to whether to use either the percentage of completion method or completed contract for reporting profit on longterm contracts?
To understand the impact of the Alternative Minimum Tax (AMT) on the choice between the percentage of completion method (PCM) and the completed contract method (CCM) for reporting profit on long-term contracts, we need to consider the tax implications of each method.
1. Percentage of Completion Method (PCM):
- Under PCM, revenue and expenses are recognized based on the percentage of completion of the contract.
- Tax implications: For regular tax purposes, profit recognized using PCM is taxable in the year it is earned, even if the actual cash has not been received. However, for AMT purposes, revenue is only recognized when cash is received or taxable income determined under PCM exceeds the contract price.
- Impact on decision-making: Since AMT defers the recognition of income until cash is received or it exceeds the contract price, the impact of AMT may delay the timing of tax payments. Companies may prefer PCM for regular tax purposes to recognize income upfront, allowing them to claim deductions and reduce taxable income.
2. Completed Contract Method (CCM):
- Under CCM, revenue and expenses are recognized only when the contract is completed.
- Tax implications: For regular tax purposes, revenue and related expenses are recognized and taxed when the contract is completed. However, for AMT purposes, the entire taxable gain is deferred until the contract is completed and final profit determined.
- Impact on decision-making: CCM delays the recognition of income for both regular tax and AMT purposes until the completion of the project. This may lead to lower current tax liabilities. Companies with fluctuating profits might prefer CCM to minimize the impact of AMT and defer tax payments.
In summary, the impact of AMT on the decision to use PCM or CCM lies in the timing of income recognition and tax payments. If a company wants to accelerate income recognition for regular tax purposes and does not mind paying taxes upfront, PCM might be preferred. On the other hand, if a company aims to defer tax liabilities and income recognition until project completion, CCM may be more suitable, potentially reducing the impact of AMT.