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.