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Thereafter, Michael L. Powers (Powers), petitioner's accountant,
would make annual or semi-annual adjusting entries to convert
petitioner's books to the percentage of completion method for
financial statement reporting, as required for bonding purposes,
and to the cash method of accounting for income tax purposes.
Petitioner is a mechanical contractor that provides plumbing
installation, heating, and air conditioning work for general
contractors or job site owners (customers). Petitioner's typical
jobs are for new commercial construction and its installation
sites include churches, schools, and retail complexes.
Petitioner's business is located in a 5,000-square foot building.
Of that 5,000 square feet, 2,000 square feet comprise an office
and the other 3,000 square feet comprise a warehouse. In the
warehouse petitioner stored materials, such as large piping, duct
work, plumbing materials, sheet metal, small hardware pieces, and
materials left over from various job sites. On occasion,
petitioner uses the warehouse to store materials that are
eventually going to a job site. For the taxable year in issue,
the value of the materials maintained at petitioner's warehouse
was between $10,000 and $20,000.
Petitioner procures jobs through a bid process. The factors
that went into estimating a bid price for a job included
materials, supplies, equipment, subcontracts, and labor costs
(total direct expenses). Prior to submitting a bid proposal,
petitioner increases the total direct expense by either 10 or 20
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