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 track and account for medical equipment financing and lease payments?
The accounting depends on whether you have an equipment loan, capital lease, or operating lease. Recording the full monthly payment as an expense is the most common mistake. Each arrangement requires different treatment on your balance sheet and income statement.
Read answerCan a landscaping business deduct the cost of a trailer and mowing equipment in the first year?
Yes. Section 179 lets you deduct the full purchase price of qualifying equipment like mowers, trailers, and trucks in the year you buy them. The 2024 limit is $1,220,000, which covers most landscaping equipment purchases easily.
Read answerWhat are the most commonly missed tax deductions for owner-operator truck drivers?
Per diem alone can save owner-operators thousands each year, and most drivers miss it entirely. Other commonly overlooked deductions include ELD device fees, lumper fees, scale tickets, truck washes, and DOT physicals.
Read answerWhat are the accounting requirements for Medicaid managed care contracts versus fee-for-service?
Fee-for-service revenue is booked per claim at the Medicaid fee schedule rate, while managed care capitation is booked as a flat monthly per-member-per-month payment regardless of services delivered. Each model creates different cash flow patterns that require their own forecasting approach.
Read answerHow does bonding capacity affect my construction company's bookkeeping requirements?
Surety companies base your bonding capacity on financial statements, working capital ratios, and WIP schedules that all come directly from your books. Sloppy bookkeeping doesn't just create tax headaches. It shrinks the jobs you're allowed to bid on.
Read answerWhat bookkeeping system should I use to track insurance reimbursements by payer for my medical practice?
Use your practice management system for claims and aging, then reconcile monthly into QuickBooks Online. Set up each insurance payer as a customer in QBO so you can track payments, denials, and adjustments by payer.
Read answer
