Construction Today - November 2017 - 98
Residential By Jennifer French, CPA Choosing an Accounting Method W hen it comes to accounting, many contractors have two burning questions: which accounting method is best for my company, and which will give me the best tax advantage? For regular taxpayers, their only concern is whether their overall accounting method should report income on the cash basis or the accrual basis of accounting. However, contractors have other factors that need to be considered. Contractors have the opportunity to use multiple methods of accounting for their long-term contracts. These methods will depend on whether the company is a small or large contractor and whether their contracts are short-term or long-term. Cash vs. Accrual Under the cash method of accounting, taxable income is comprised of cash receipts, 98 CONSTRUCTION-TODAY.COM NOVEMBER 2017 net of expenses and constructive receipts paid during the year. A constructive receipt occurs when money or property is available to the taxpayer without any restrictions. If the taxpayer receives a check in the mail on Dec. 30, 2017, but does not deposit the check until Jan. 2018, it is still considered income in 2017 since the funds were available to the taxpayer in 2017. Typically under the cash method, expenses are deducted in the period paid with the exception of some prepaid expenses. For example, prepaid insurance of $1,000 paid in July 2017 that covers the period July 2017 to June 2018 would be deducted half in each year since the payment benefits both years. The small business exception expands the use of the cash method of accounting to individuals, S corporations and partnerships without a C corporation as a partner with average annual gross receipts of $10 million or less. The cash method of accounting does not apply if your business is a corporation or a partnership with a C corporation as a partner, when average annual gross receipts exceed $5 million. If a contractor is unable to use the cash method of accounting, they must use the accrual method. This method attempts to match expenses incurred during the year with the related income. Income is reported when income is earned and the amount can be determined.