Should my construction company use cash or accrual accounting for tax purposes?
Most contractors asking this question are really asking which method saves more on taxes. The answer is usually cash. But saving on taxes and understanding your business are two different things, and cash basis accounting makes the second one harder.
If your construction company averages under $29 million in annual gross receipts over the prior three years, you can use the cash method for tax purposes. That threshold comes from the Tax Cuts and Jobs Act and it covers the vast majority of construction companies in the Phoenix area. Once you cross that $29 million line, the IRS requires the percentage-of-completion method for long-term contracts, which is a form of accrual accounting.
Cash basis means you record income when you receive payment and expenses when you pay them. For a contractor, this creates natural tax deferral. If you bill a client in December but don’t collect until January, that income falls into next year’s tax return. You can also accelerate expenses by paying vendors and suppliers before year-end to reduce taxable income. It’s simple, it’s legal, and it puts more control over timing in your hands.
The problem is that cash basis gives you a distorted picture of how your jobs are actually performing. You might look profitable one month because a big draw came in, then look terrible the next month when you pay subs and material invoices. The cash flow timing hides whether you actually made money on a project. You won’t know until the job is completely finished and every dollar has moved in and out.
Accrual accounting with work-in-progress reporting solves this. On accrual, you recognize revenue as you earn it and expenses as you incur them regardless of when cash changes hands. WIP reports compare the percentage of work completed against the percentage of the contract billed and the costs incurred to date. This tells you mid-project whether you’re over budget, under-billed, or losing money. That visibility matters a lot more than most contractors realize until they finish a job and discover they lost $20,000 somewhere along the way.
The practical approach many construction companies take is to file taxes on a cash basis while maintaining accrual-style internal reporting for management decisions. You get the tax deferral benefits of cash while still seeing accurate project-level profitability. This requires your books to be set up properly with job costing enabled and someone who understands construction financials maintaining them.
Your CPA should weigh in on which tax method fits your situation based on your revenue, contract types, and growth trajectory. But don’t let the tax decision be your only consideration. If you can’t tell which jobs made money and which ones didn’t, the tax savings from cash basis won’t matter much when margins are disappearing and you don’t know why.
If your books aren’t currently set up for job-level tracking or WIP reporting, that’s worth fixing before worrying about the accounting method debate. Reliable small business bookkeeping services built around construction workflows will give you the financial clarity to make better decisions on every project you take.
Your Valley of the Sun Bookkeeper
The Next Step:
A Quick Conversation
Tell us what's going on with your books. We'll listen, ask a few questions, and give you a clear quote with no surprises.
More Questions
How do I properly allocate shared costs between program services and administration on Form 990?
Pick a reasonable allocation method like time spent, square footage, or direct benefit and apply it consistently. Document your methodology thoroughly because the IRS and donors both scrutinize how much of your spending goes to programs versus overhead.
Read answerHow do I set up payroll for the first time for my small business?
Start by getting an EIN, registering with Arizona DES for unemployment insurance, and setting up EFTPS for federal tax deposits. From there, collect employee forms, choose a payroll system, set your pay frequency, and run your first payroll.
Read answerHow do I calculate the true cost per cleaning job including overhead?
Add your loaded labor cost, supplies, and drive time as direct costs. Then allocate all overhead across your billable hours. Most cleaning businesses undercharge because they only count what they pay their cleaners.
Read answerHow do I track depreciation schedules for multiple rental properties in QuickBooks?
Create a parent fixed asset account for each property with sub-accounts for building, land, and improvements. Depreciation for residential rental buildings uses 27.5 year straight-line, and land is never depreciated.
Read answerHow should a dental practice track PPO write-offs and fee schedule adjustments?
Record every procedure at your full UCR fee, then post the contractual adjustment as a separate entry. Track those adjustments by insurance company so you can see which PPO plans are actually profitable and which ones are costing you money.
Read answerHow do I track equipment costs per construction job including depreciation and fuel?
Calculate an internal equipment rate that bundles depreciation, maintenance, insurance, and fuel into a single hourly cost. Multiply that rate by the hours each piece of equipment works on a job to allocate costs accurately.
Read answer