Work in Progress (WIP) for professionals can be reported as income for tax and accounting purposes?
The law provides special rules for computing the income of taxpayers (corporate or individual’s) carrying on designated professional businesses. These rules permit taxpayers to elect to exclude the amount of WIP at the end of the year from income.
WIP is really a form of inventory. The basis for valuing WIP is the amount that can reasonably be expected to become receivable after the year end, in other words “billable hours X hourly rate”. This value should be listed as a current asset on the Balance Sheet of your financial statements.
Most designated professionals exclude the value of their WIP from income. Types of designated professionals can include Accountants, Lawyers, Dentists, Medical Doctors, Veterinarians and Chiropractors.
The time for making an election to not include the WIP as income is upon the filing of the tax return for the year for which the election is made. You do not require a special form to make this election. A letter may be attached to the taxpayer’s tax return or a note can be added to you corporate financial statements. Once a taxpayer has made an election not to include WIP in income, then it may not be changed in subsequent years unless the election is revoked. You would have to prove to CRA that the change results in a more appropriate method of accounting for WIP and it does not create an unfair tax advantage for you.
One main reason to exclude WIP from calculating income is the Matching Principle. The goal is to tie earned revenues to their direct costs. Therefore, it is very important to keep this in mind and communicate WIP values to your accountant when they prepare your company’s year-end.
Contact us at Gilmour Group CPAs to learn more about Work in Progress and how to report this for tax and accounting purposes.
Grant Gilmour B.SC. MBA, CPA, CA is the International Tax Partner of Gilmour Knotts Chartered Accountant. To connect with Grant visit: www.gilmour.ca
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