Construction company owners operate in one of the most complex business environments of any industry. Long-term contracts, retainage, fluctuating job costs, labor constraints, and uneven cash flow all affect how a company is managed day to day and how income must be reported for tax purposes—often in ways that feel disconnected from the cash actually available to run the business. Choosing the right accounting method is not simply a compliance decision; it directly impacts taxable income, estimated tax payments, IRS scrutiny, and long-term tax planning. Financial statements, bonding requirements, and tax planning are all interconnected for construction companies, and the accounting method sits at the center—shaping when income is taxed and how the business can plan and grow.

Cash Method
Under the cash method, income is reported when payments are received and expenses are deducted when paid. This method is common for smaller contractors because it generally aligns taxable income with cash flow and is simpler to maintain. However, it can produce inconsistent tax results on longer projects and is no longer permitted once a contractor exceeds certain IRS gross receipt thresholds.  For tax years beginning in 2026, that threshold is $32 million, based on a rolling three-year average of annual gross receipts.

Accrual Method
The accrual method reports income when it is earned and expenses when incurred, regardless of when cash changes hands. For tax purposes, this can result in income being taxed before it is collected, particularly when retainage or slow-paying customers are involved. Accrual accounting is required for many contractors as revenue increases and is often the foundation for other construction-specific tax methods.

Percentage of Completion Method (PCM)
PCM requires contractors to recognize taxable income over the life of a project as work is performed, typically based on costs incurred to date. This method is required by the IRS for many long-term contracts and is a major driver of tax timing for larger construction companies. Because taxable income is tied to project estimates, PCM requires careful job costing, ongoing monitoring, and proactive tax planning to avoid surprises.

Completed Contract Method (CCM)
CCM allows eligible contractors to defer recognizing income and expenses until a project is substantially complete. From a tax perspective, this can significantly delay income recognition, but it is only available for qualifying small contractors and certain contracts. Improper use can lead to IRS adjustments, making eligibility analysis and documentation critical.

Hybrid Methods
Some construction companies use hybrid approaches, such as cash or accrual for general operations combined with PCM or CCM for long-term contracts. These methods can provide meaningful tax planning opportunities but must be structured carefully to comply with IRS rules and consistency requirements.

Choosing the Right Method
There is no single best accounting method for construction companies from a tax perspective. The optimal approach depends on revenue size, contract length, growth trajectory, cash flow needs, and long-term tax strategy. Because changing accounting methods requires additional IRS filings and can trigger additional taxable income, these decisions are best made proactively as part of an ongoing tax advisory relationship rather than reactively during tax return preparation.

Other Construction-Specific Tax Considerations
If accounting method decisions weren’t enough, construction companies also face a range of industry-specific tax issues that can materially affect planning and compliance, including:

  • Retainage treatment, which can create mismatches between taxable income and cash received
  • Job cost allocations, particularly for shared labor, equipment, and overhead
  • Change orders and contract modifications, which can affect income recognition timing
  • Multi-state filing requirements, driven by job locations and nexus rules
  • Union labor agreements, including the tax treatment and timing of union benefit contributions, fringe benefits, and compliance with collective bargaining agreements
  • Payroll and subcontractor compliance, including worker classification, certified payroll, and information reporting requirements
  • Timing of deductions for equipment, materials, and large purchases, including depreciation and expensing elections

Coordinating these issues with the company’s accounting method—and revisiting them as the business evolves—is a key part of managing tax exposure, maintaining compliance, and building a long-term advisory relationship.

At Linkenheimer, we work with business owners year-round to connect tax strategy, operations, and long-term planning, so there are fewer surprises, better decisions, and a clearer path forward.