Change in Tax Treatment of “Work in Progress” for Professionals
By Patricia Day, CPA, CA, CBV, TEP, Tax Partner
Big-ticket items invariably attract the headlines at budget time, but at GGFL we comb through the small print to find measures that impact our clients.
The Federal Budget released on March 22, 2017 proposes changes to the tax treatment of “Work In Progress for Professionals.” These changes could have a significant impact on tax bills for professionals. Tax legislation specifically includes Accountants, Chiropractors, Dentists, Lawyers, Medical Doctors, and Veterinarians as professionals.
Work in Progress (WIP) is the work that has been performed but not yet billed to clients. The value of WIP will vary according to the size of the practice. Those in partnerships need to be especially alert to this.
Prior to this latest budget, professionals could elect to not include any work in progress in taxable income until the work was billed. However, expenses related to that unbilled income could be deducted in the year they occurred. The Budget proposes to change this approach and will disallow the deduction of costs until the work is billed.
According to the Budget, WIP is to be included in taxable income at the lesser of cost and fair market value. Most professionals value WIP based on their billing rates. To value WIP at cost, include only amounts that have been expensed. This would include salary costs and fees paid for professional services, as well as disbursements such as courier charges. The costs would generally exclude any cost for the time of the owners of the business, unless they are paid professional fees that are expensed.
These changes will take effect for all fiscal years that begin after March 22, 2017. If your practice operates on a calendar year, that would be the year beginning January 1, 2018.
The Budget proposes implementation of this change over a two-year time frame. For the first year, 50% of the WIP must be included in income at year’s end. In the second and subsequent years, 100% of the WIP must be included in income.
What you should consider:
- Are you carrying WIP on your books that will never be billed or will never be billed in total?
- Reviewing your WIP at year-end and making a supportable and reasonable adjustment to fair market value, where there is uncertainty, on a job-by-job basis.
- For professionals with contingency fees, CRA has announced that until the right to collect an amount is established, the amount is not receivable. In these cases, in valuating the WIP, no amount should be included for these jobs.
Members of GGFL’s team of experienced tax experts are ready to help. If you are impacted by this proposed new measure, and need advice on how best to navigate your future tax filings, please contact us at 613.728.5831, or email firstname.lastname@example.org. Also visit our GGFL Library for all the latest in accounting and tax news.
The information provided in this publication is intended for general purposes only. Care has been taken to ensure the information herein is accurate; however, no representation is made as to the accuracy thereof. The information should not be relied upon to replace specific professional advice.