Contractors must know all accounting options

Construction companies face an imposingly complex choice when it comes to their accounting methods. Because no two projects are ever alike, and your earnings may fluctuate from year to year, it’s important to know your options.

The IRS has stated that contractors must select an accounting method that clearly reflects their income. You may choose from four approaches:

1. The cash method. A cash method taxpayer recognizes income when it’s received. But a taxpayer may not use the cash method if its total merchandise purchases for the year are substantial compared to its gross receipts. Thus, most contractors can’t use it because merchandise includes any item physically incorporated in a product, including all building materials.

2. The accrual method. With this approach, a taxpayer recognizes income and expenses when the underlying service or event occurs, which isn’t necessarily when cash changes hands. A major benefit of this method is that it provides a more accurate matching of revenue and expenses as both are recorded when incurred, not necessarily when paid. This method can also allow additional tax-planning opportunities through year-end accruals.

  Contractors must know all accounting options