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The accounting method you choose has a bigger impact than it seems. It determines when revenue counts, when expenses matter, and how closely your books match what’s actually happening on your jobs. Different methods can paint completely different pictures of the same work.
So it makes sense that many contractors start by asking about the cash method and whether it fits the way they operate.
If you’re running a smaller construction business, chances are the IRS actually gives you the option to use the cash method. It’s simple. You record income when the money hits your bank. You record expenses when you actually pay the bill. It feels clean and familiar because it mirrors how most people manage money in their personal life.
But it also has its own set of rules, limits, and tradeoffs.
Eligibility and IRS Limits
To use the cash method, your average gross receipts must be under the IRS threshold, which is typically around 25 million over the prior three years. This is why you see smaller contractors using it more often, especially those with projects that finish within two years.
Once your revenue grows beyond that level, the IRS expects a more structured system. At that point, you’re required to move to accrual-based methods that show a clearer picture of ongoing work.
How It Really Works
With the cash method, you record income only when you receive payment. If the client pays late, your revenue shows up late. If you pay a big supplier bill on December 30, the deduction lands in that year. If you wait until January, the deduction moves to the next one.
Nothing about the method looks at when the work was actually performed. It’s driven by cash movement, not job progress.
This gives you a very real-time feel for what’s actually in your bank, but the timing can create a disconnect between the work happening on your job sites and the numbers appearing on your tax return.
The Upside
There are some clear benefits contractors appreciate.
• It’s straightforward
• It gives you flexibility at year-end
• Taxable income often lines up more closely with cash on hand
When you’re smaller and cash flow is tight, this simplicity can help you breathe a little easier.
The Downside
But the same simplicity can cause problems as your business grows.
• It can create big swings in profitability from year to year
• Income and expenses don’t always match the period when the work was done
• Some contract types, especially longer jobs, really don’t fit the cash method
• Banks and bonding companies may prefer accrual-based statements
One more important point that often gets misunderstood. The cash method cannot be used with the percentage-of-completion method. PCM is an accrual-based system that recognizes revenue as the job progresses, not when you get paid. The two methods don’t mix.
Final Thoughts
For many smaller construction contractors, the cash method works well. It keeps things simple and gives you a lot of control around tax planning. But as your projects get larger or your revenue moves closer to the IRS threshold, it may start holding you back. The key is understanding how the method affects your financial visibility and whether it supports the direction your business is heading.
