This is a guest blog from a colleague of mine, Mayur Gadhia, CPA, CA
Are You Prepared for the Change to Accounting for WIP on Your Taxable Income?
Historically, paragraph 34 (a) of the Income Tax Act (the “Act”) allowed designated professionals like lawyers, dentists, medical doctors, veterinarians and qualified accountants to file an election to exclude the value of their year-end work-in-progress (“WIP”) for projects where the work was completed over a period of time from taxable income for the current year. This approach was commonly referred to as billed-basis accounting (“BBA”) because the income was recognized into taxable income when the client was billed.
On March 22, 2017, the federal government proposed to revoke the election effective for all fiscal years that begin after March 22, 2017. Upon passing of the legislation, going forward, the WIP is deemed to be inventory as required by paragraph 10 (5) (a) of the Act.
In this article, we will discuss the impact of this change on accounting and costing of WIP on law firms, transitional rules, and, finally, I will give some practical business implications on law practices.
Read more here.