Wilburn CPA

Construction Accounting Basics

Your P&L says you made $180,000 this year. Your bank account doesn’t agree. If you’ve ever stared at those two numbers wondering which one is lying to you, the answer isn’t a bookkeeping error — it’s the accounting method behind them. Cash basis and accrual basis tell two different stories about the same business, and most builders have never been told which one they’re actually looking at.

Cash Basis: What It Actually Shows You

Cash basis accounting records income when the check clears and expenses when you pay the bill — nothing more complicated than that. It’s simple, it’s intuitive, and for a lot of small builders it’s genuinely the right way to file taxes.

The catch is what it hides. A big draw that hits your account in December can make a struggling year look great. A slow month where three subs got paid but no draws came in can make a profitable year look like a disaster. Cash basis tracks your bank balance, not your job performance — and those are not the same thing.

Accrual Basis: What It Actually Shows You

Accrual basis records income when it’s earned and expenses when they’re incurred — regardless of when the cash actually moves. A $40,000 draw you’ve billed but haven’t collected still counts as income this month. A $12,000 material order you’ve received but haven’t paid for still counts as an expense.

This is the version of your numbers that actually matches job performance, and it’s the only version that supports a real WIP schedule. Percentage-of-completion, over/underbilling, true job profitability — all of it depends on matching revenue and cost to the period they actually belong to, not the period the cash happened to move.

What the IRS Actually Requires (This Is Where Builders Get Confused)

Here’s the part most builders have never heard explained plainly: the IRS doesn’t force accrual accounting on every contractor. There’s a gross receipts test — for 2026, it’s $32 million in average annual gross receipts over the prior three tax years (that threshold adjusts for inflation every year, so it’s worth confirming the current number before you rely on it). If you’re under it, you generally have a choice of tax accounting method, and you’re also exempt from the percentage-of-completion method that’s otherwise required for longer-term contracts.

Most custom builders and remodelers in the $1M–$15M range are well under that threshold. That means the cash-vs-accrual decision for your tax return is usually a genuine choice, not a mandate — and it’s worth making deliberately instead of by default.

One more recent wrinkle worth knowing: the 2025 tax law changes (the “One Big Beautiful Bill”) repealed the percentage-of-completion-capitalized-cost method for residential construction contracts and opened up the completed-contract method to residential contractors of any size — not just those under the small-contractor threshold — for contracts entered into after July 4, 2025. If that applies to your contract mix, it’s worth a conversation about whether it changes anything for you.

Why the Best Answer Is Often “Both”

This is the piece that trips builders up most: you don’t have to pick one method and use it everywhere. It’s common — and often smart — for a builder to file taxes on the cash method, which can defer tax and keeps the return simple, while running the internal books on an accrual or percentage-of-completion basis for actual decision-making.

That internal accrual view is what feeds an accurate WIP schedule and real job costing — the numbers a bank or surety wants to see, and the numbers you actually need to know which jobs are worth repeating. Cash basis on the tax return and accrual-based numbers for management aren’t in conflict; they’re two tools doing two different jobs.

Common Mistakes Builders Make

• Assuming accrual is legally required at your size, and either avoiding it or over-engineering your books unnecessarily
• Filing cash basis but never building an internal accrual or WIP view — so job performance stays invisible all year
• Switching methods without a formal accounting method change, which the IRS treats as a specific filing, not just a decision
• Assuming the threshold or the rules from a few years ago still apply, instead of confirming the current-year numbers

How to Get Started

The right setup depends on your size, your contract mix, and what your bank or surety actually asks to see — there’s no single answer that fits every builder. If you’re not sure which method you’re filing under, or whether your internal numbers are giving you an accrual-accurate picture of job performance, that’s exactly the kind of question we work through with builders and remodelers every day. Book a free discovery call and we’ll take a look at how your books are set up today.

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