When does a Home Builder deduct Contract Labor.

[Adri]

Client is small S Corp  Home Builder.  Builds 1 house per year and sells it before the year's end.   For tax year 2021, he built a house & paid his subcontractors, plumber, electrician, masonry, etc. all in 2021 but did not sell the house until February 2022. #1 Since he is a builder selling less than $ 25,000 000.Can he deduct his subcontractors until 2022 when the house sold? and # 2 Will he give subcontractors' 1099s NEC in 2022?   Thank you. 

[IRonMaN · Accepted solution]

They are inventory costs that won't be expensed until 2022.  The 1099s should have gone out in January for the 2021 payments.

[dascpa]

Agree with IronMan.  Most small home builders are on the Completed Contract Method of accounting.  Therefore all costs are capitalized until the property is sold.  Then it is expensed as a cost of sale.  But the taxpayer still reports subcontract labor to the IRS for 1099 purposes on the cash basis method - in the year paid.

[Adri]

Thank you very much for your answer.

[Adri]

Thank you very much for your answer and the explanation.