Construction Today - November 2017 - 98
By Jennifer French, CPA
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,
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.