Most contractors can use cash basis accounting. The IRS allows it as long as your average annual gross receipts over the past three years stay under $29 million. That threshold covers the vast majority of contractors in the Treasure Valley and beyond.

Cash basis is straightforward. You record income when you receive payment and expenses when you pay them. No tracking receivables or payables on the books. Many contractors prefer this because it simplifies recordkeeping and gives them some control over tax timing. Push a payment into January and that income hits next year’s return instead of this year’s.

The simplicity comes with tradeoffs. Cash basis doesn’t match revenue to the project that generated it. You might finish a $50,000 job in November and not get final payment until February. Your books show the expense of completing that job in one year and the income in another. For tax purposes that’s fine. For understanding how your business actually performed, it creates a distorted picture.

Job costing gets harder on cash basis. Construction accounting requires knowing which projects make money and which ones lose money. When income and expenses don’t land in the same period, profitability by project becomes harder to track accurately. Some contractors run cash basis for taxes but track work-in-progress and job costs separately to get a clearer operational view.

Retainage complicates things too. If a general contractor is holding back 10% until project completion, that money doesn’t show up in cash basis until you actually receive it. Meanwhile you’ve already paid for the labor and materials. Your books might show a loss on a profitable job simply because of timing.

For small residential contractors doing shorter jobs where payment comes at completion, cash basis works well. The timing differences are minimal and the simplicity is worth it. For larger commercial work with longer project timelines, progress billing, and retainage, the limitations become more noticeable.

There’s no rule that says you have to choose one method and never revisit it. As your business grows and projects get more complex, the right accounting method might change. What works for a contractor doing $300,000 in annual revenue might not work as well at $3 million.

If you’re not sure which method fits your situation, that’s worth a conversation. Small business bookkeeping for contractors isn’t one-size-fits-all, and the accounting method you use affects how useful your financial reports actually are for making decisions.