Entrepreneurs involved in the construction of buildings operate both legal entities and individuals. Experts note that this type of activity has its own accounting and reporting features. The topic is commented on by the independent auditor Altay Jafarov.
According to the latest amendments to the Tax Code, persons engaged in the construction of buildings cannot be payers of the simplified tax. Article 130.6 of the Code establishes that the income associated with the provision of residential and non-residential premises by persons carrying out construction activities and the expenses deducted from this income are income of residential and non-residential premises provided for work (stages) performed during the tax year. The amounts excluding VAT are determined based on the costs incurred in connection with the construction of these plots, as well as the costs incurred in connection with the acquisition of land.
When determining the income and expenses associated with the construction of a building, the following factors are taken into account:
building construction is a long-term activity;
The construction of a building can be carried out from year to year, even for years. It can also be carried out in stages;
to determine income, it is necessary to provide residential and non-residential premises;
construction costs should be formed in terms of value;
a certain part or a certain stage of the building must be built to generate income and expenses.
Consider other articles on income generation reflected in the Code:
Article 13.2.12. Revenue – the total cost of operations related to the provision of goods (works, services), as well as non-operating profit. The time of receipt of income for tax purposes is determined by Articles 132 and 135 of this Code.
In addition, we should take a look at article 13.2.10 of the Vegi Code to clarify the concept of supplying goods.
Article 13.2.10. Supply of goods – transfer of ownership of goods, as well as not being limited to them, sale, exchange of goods, donation, payment of wages and other payments in kind, as well as transfer of ownership of pledged goods to the mortgagee or another person, construction of buildings, alienation of residential and non-residential premises by persons carrying out their activities under notarized contracts, as well as under contracts concluded without notarization, as well as by decision of the general meeting of members of the housing cooperative.
Subsequent notarization of sales contracts for the provision of residential and non-residential premises by persons engaged in the construction of buildings with the same person is not considered a taxable representation for the purposes of this article.
Example 1: Suppose LLC AA decides to construct a ten-story building and advertises accordingly. Before the start of construction, 200,000 manats were received from several citizens on a contractual basis.
Question: In this case, is the money received by the LLC considered income and how much does it cost?
Incomes in the amount of 200,000 manat received by “AA” LLC from citizens are not taken into account. Despite the fact that an agreement has been concluded with citizens, this amount cannot be considered income, since there is practically no construction and no costs. However, this amount must be calculated and paid value added tax.
So, according to article 13.2.12 of the Tax Code, if a person constructing a building makes a presentation, this amount should be considered his income. In addition, according to Article 13.2.10, the alienation of an apartment under any contract of purchase and sale concluded by the person building the house, or by the decision of the cooperative, is considered income. It can be concluded that the amount received from the construction of the building should be considered income. However, according to article 130.6 of the Internal Revenue Code, any part of the building and any stage must be constructed to generate and recognize income and expenses. Consequently, 200,000 manat shown in the example is not considered income.
Example 2: Suppose “AA” LLC sells all 10 floors of a building to citizens and receives 5,000,000 manats from the sale. In fact, in 2020 he completed the construction of only 5 floors of the building and received 2,900,000 manats from its sale. The estimated cost of construction is 3 million manat. 1 million manat was spent on the actual construction of 5 floors and 300 thousand manat for the purchase of land.
Question: How are income and expenses formed?
Despite the fact that the total amount of the received LLC is 5 million manat, in 2020 the income from the actually built areas will be 2.9 million manat. In addition, despite the estimated cost of 3 million manat, in 2020 it will show the actual cost of 1 million manat + 300 thousand manat for land = 1.3 million manat.
Thus, the costs and proceeds from the construction of the building are accounted for at the stage actually completed. The remaining proceeds, as well as the advances received, are expensed as future expenses and when a part of the building is completed on the next floor or at the end of the year, the income and expenses for the completed part are recognized.
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