Contractor’s taxation – The tax authorities separates between contractors to other entities. The contractor’s income from his business activity is defined as a business income seeing his activity often take more than a single tax year, this being different to other trading fields. Contractors have a unique taxation lax. The IRS separates a building contractor to an operating contractor for tax purposes.
Operating contractor – A contractor who isn’t a building contractor that his operating period is more than a year. Independent from the project duration, income will be reported starting from the year in which 25% of the financial of operational aspect of the project has been completed. Losses will be recognized for tax only when completing 50% of the project, the amount recognized will be relative to the completion of the project.
Building contractor – A contractor whose buildings are considered his business’s inventory and the duration of their erection is over a year. All income from such projects will be reported once the buildings are ready for use, meaning once the electricity is connected or the official date of receiving clearance for ending the construction. Any losses will be recognized at the ending of the construction.
More over, the tax regulations include instructions for recognition in interest expenses and General and administrative expenses by contractors, these expenses are attributed to different projects and are deductable only when recognizing the income from the same project. Sales of real estate (land) is taxable for capital gains, however it is determined that profits that are taxable by regular tax are exempt from capital gain tax.
For VAT law it has been determined that in a real estate deal involving land the VAT payment will accrue when delivering the land to the buyer or when the buyer registers himself in the proper authorities, the earlier of the 2 specified. Despite all this a building contractor that has completed construction but hasn’t sold all the inventory can postpone it’s reporting to VAT for a period of up to 24 months. An operational contractor with continues activities will be taxed for VAT when paid.
The Yanai Amir accounting office will be glad to advise you regarding contractor’s taxes.