Tax Guide for Construction and Contracting Businesses

Tax Guide for Contractors and Construction Businesses

Accounting Method Matters

Cash Method

• Income recognized when received
• Expenses deducted when paid
• Simpler for small contractors

Accrual Method

• Income recognized when earned
• Required for larger businesses ($29 million+ average gross receipts)

Completed Contract Method

• Income and expenses reported when job is completed
• Allowed only for small contractors (under $30 million)

Percentage of Completion Method

• Income recognized proportionally as work is completed
• Required for long-term contracts over certain thresholds

Key Deductions

Equipment

• Section 179 and bonus depreciation are crucial for contractors
• Vehicles over 6,000 lbs GVWR (pickups, SUVs) qualify for full Section 179

Subcontractor Payments

• Fully deductible business expense
• Must file Form 1099-NEC for subcontractors paid $600+

Tools and Supplies

• Small tools (under $2,500): Deduct immediately
• Larger tools: Capitalize and depreciate (or Section 179)

Job Costing

• Track labor, materials, and overhead per project
• Essential for pricing, profitability, and tax reporting

Sales Tax on Construction

• Complex rules vary by state and type of work
• Capital improvements vs. repairs have different tax treatment

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Construction business? Proper job costing and depreciation strategy can save you significantly.