Question 1

What factors should drive your construction company’s budget?

Accepted Answer

Identifying factors that drive your construction company’s budget is important. There are many moving pieces that can change the dynamics of your business quickly and without warning. Some factors that can alter the course of your company’s financial well-being include:

Basic overhead costs
Soft business requirements
Permits and licensing requirements
Employee costs
Tools, supplies and inventory
Loan and credit card payments
Services like as accounting, maintenance and marketing
Payments for equipment or vehicles

Question 2

Why is it important to choose the right accounting method for your construction business?

Accepted Answer

Choosing the right accounting method for your construction business is important. Your choice depends on type of contracts, contracts’ completion status at the end of your tax year, and average annual gross receipts. You are not limited to one method and many companies use one method for long-term contracts and another for everything else. The two most common methods are cash method and accrual method.

Question 3

What is the cash method of accounting and who can use it?

Accepted Answer

One method some contractors use for all contracts is the cash method. However, not every company can use it.
Basically, a contractor using the cash method of accounting reports cash receipts as income when received, according to the IRS, and deducts expenses when paid. If an expense benefits you for more than one tax year, it must be spread out over the period the benefit is received.
To qualify for using the cash method, your business must be considered a small business taxpayer. A small business taxpayer is a taxpayer that (a) has average annual gross receipts of $25 million or less for the 3 prior tax years and (b) is not a tax shelter.

Question 4

What is the accrual method of accounting?

Accepted Answer

If you cannot use the cash method, another option is an accrual method. Some companies have several specialized accrual methods available, each with its own rules and limitations. According to the IRS, “In general, all accrual methods attempt to match the expenses that relate to a specific contract to the income from that contract.”
The accrual method involves:

Classifying all contracts as either short term or long term.
Classifying all long-term contracts as either home construction or general construction contracts.
Classifying yourself as either a small or large contractor.

Usually, large companies must use the percentage of completion method (PCM).
Small companies have a choice of the PCM, standard accrual, exempt percentage of completion or completed contract method.

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