A company could appear to be profitable when realistically, they have no readily available cash to cover working capital or debt obligations. This method can give you a more realistic view of income and expenses at a given time, but you are taxed on the revenue before you receive the cash. With this method, you would record revenue when the project is billed, rather than when you get paid. On the other hand, accrual accounting recognizes revenues as they are earned and expenses are deductible as they are incurred regardless of when the cash is actually received, or when expenses are paid. However, it may not be the best option for construction contractors due to the uncertainty of income of long-term contracts and other ongoing projects or contracts in which the cash is not yet received or paid. The cash method of accounting can be beneficial because you are not taxed on income before you have received the cash. Under the cash accounting method, revenue is recognized when cash is received, and expenses are deductible only when they are paid. Your tax accounting method determines when revenues are recognized and included in taxable income and when purchases and other expenses are deductible. It’s important to understand if you qualify as an SBT because SBTs have more options in choosing accounting methods than those not considered. Once a taxpayer is no longer an SBT, they are precluded from using a method other than the percentage of completion method (PCM) for their long-term contracts for not only the year in which they are no longer considered an SBT, but for every year thereafter in which they are not an SBT. The analysis to determine if a taxpayer is an SBT needs to be done every year. Certain related entities must be combined when calculating the SBT threshold. The $26,000,000 threshold is for tax years 2019-2021 and is adjusted for inflation each year. An SBT is a taxpayer whose three-year average annual gross receipts are under $26,000,000 for the period ending with the taxable year which precedes the current year of the entity. The first step in understanding the best tax accounting method for your construction business is recognizing whether you are considered a small business taxpayer (SBT). We have provided you with a summary of some of the common tax accounting methods available for construction contractors to help you understand the options that might be available to you. Understanding what accounting method to use for the preparation of your income tax return in your construction business can be an overwhelming task due to the many different options. Therefore, accurate bookkeeping is essential to the longstanding financial success of your business. What might appear as a minor mistake in your bookkeeping can cause long-term financial repercussions that may cause you to be less profitable or pay more in taxes than you should. However, accurate books are an essential part of long-term success for your business. At times, it can be difficult to monitor everything, let alone spend additional time crunching numbers and keeping track of the bookkeeping. Owning and operating a construction business involves a lot of work between managing job sites, equipment, contracts and other projects. Construction Tax Construction Accounting Methods Construction Accounting