Most contractors can choose between cash and accrual accounting, and for many the cash method is the better fit. Under cash accounting, you record revenue when money hits your account and expenses when you pay them. Under accrual accounting, you record revenue when you earn it and expenses when you incur them, regardless of when cash changes hands.

The IRS allows contractors to use the cash method as long as average annual gross receipts stay under $30 million over the prior three years. Most contractors in Utah fall well under that threshold. If you exceed it, the IRS requires accrual accounting for tax purposes.

Cash accounting is simpler to manage and gives you more control over tax timing. If you know a big check is coming in December, you can delay depositing it until January to push that income into the next tax year. You can also accelerate expenses by paying bills before year-end to reduce taxable income. That flexibility helps with tax planning in ways accrual accounting doesn’t allow.

The downside of cash accounting is that it can make job profitability harder to see clearly. Say you buy $40,000 in materials in November for a job that won’t bill until February. Under cash accounting, November looks terrible and February looks artificially profitable. The job itself might be fine, but your monthly reports won’t show it.

This is where many contractors run into trouble. They use cash accounting for taxes but try to evaluate job performance using those same cash-basis reports. The numbers don’t reflect reality because costs and revenue land in different periods than when the work actually happened.

The solution isn’t necessarily switching to accrual for everything. It’s understanding that construction job costing works best when you match costs to the jobs where they belong, regardless of when payment happens. Your tax return can stay on cash basis while your internal job reports track committed costs and earned revenue.

For long-term projects spanning multiple tax years, the IRS has additional rules. Contracts that won’t be completed within the same year they start may require percentage of completion accounting, which recognizes income as work progresses rather than when the job finishes. This applies mainly to larger commercial projects and is something your accountant should help you navigate.

If you’re a smaller contractor running residential work or shorter commercial jobs, cash accounting keeps things straightforward. Just don’t expect your cash-basis profit and loss statement to tell you which jobs actually made money. That requires job-level tracking with costs assigned when they’re incurred, not when they’re paid.

The accounting method question comes up often with bookkeeping services in American Fork because contractors want simple books but also want to understand their margins. You can have both. It just requires setting up your system to track jobs properly while keeping your overall books on the method that works best for taxes.

Talk to your accountant about which method makes sense for your situation. The answer depends on your revenue level, project types, and how much tax flexibility matters to you. What matters more than the method itself is that your books are set up to give you the information you need to run the business.