Blueprints for Success: A Winning Approach for Choosing the Right Contract to Maximize Your Tax Strategy

Choosing an accounting method for your construction business is like drafting a championship team during March Madness—it can make or break your financial game. Just as a coach strategizes different plays to outsmart the competition, you can leverage various contract structures to select the most advantageous accounting method to maximize your financial optimization. In this high-stakes game, executing the play is crucial to securing that game-winning shot at the buzzer.

Cost-Plus Contracts

These contracts are ideal if you are a small contractor or working on long-term projects. They require the completed contract method, where revenue and expenses are recognized only when the project is finished. Think of it as holding the ball for the final shot—delaying income recognition to strategically defer taxes and manage cash flow.

Fixed-Price Contracts

These contracts use the percentage-of-completion method, recognizing revenue and expenses as the project progresses. This approach spreads income recognition over multiple periods, helping you avoid sudden tax spikes. It is like a steady full-court press—gradually wearing down the opponent and scoring points throughout the game.

Time-and-Material Contracts

These contracts require immediate revenue recognition, affecting your current-year tax obligations. This "pay-as-you-go" method simplifies billing and financial tracking, especially for fluctuating costs. Think of it as a fast break. Once you make the move, you are committed to the play.

Short-Term Contracts

These contracts are intended for one-time or small-scale jobs and are used by businesses with gross receipts under $25 million, following the cash method. Income and expenses are recognized when cash is received or paid, aligning with your cash flow. Consider these contracts a fast break—quick and efficient.

Long-Term Construction Contracts

These typically follow the accrual method, matching revenue with costs as the project progresses. If you are a larger contractor or one with inventory, you will most likely use the percentage-of-completion method for profitability insights and strategic expense management. Think of this as a basketball season—it is a long game, requiring focus from start to finish to secure the win.

Pro Tip: Leverage Sunset Provisions

The Tax Cuts and Jobs Act (TCJA) of 2017 includes Sunset Provisions that offer temporary tax advantages, such as accelerated depreciation and bonus deductions. These benefits are set to expire after 2025 unless extended or modified by future legislation. By strategically structuring your contracts and accounting methods, you can capitalize on these provisions and reduce taxable income. Don't wait until the buzzer sounds!

The Role of the IRS and Compliance

Like a coach choosing the right lineup, you must choose between cash, accrual, or hybrid accounting methods based on your contract types. Staying compliant with IRS regulations is essential to avoid penalties. Choosing the right strategy is like calling the perfect play—failure could cost you the win.

Experts in Construction Advisory Services

Much like a winning team builds momentum, it is essential to establish a solid playbook for long-term financial success. As one of the Top 50 Construction Accounting Firms in the United States (Construction Executive 2021, 2022, 2023, and 2024), we build long-term, value-added relationships and provide solid solutions that help positively impact your construction business. With over 67 years of leadership, experience, and expertise, our talented team of CPAs and advisors fully understand the nuances of the construction industry and provide resources beyond the traditional audit, accounting, and tax services to construction businesses throughout the country, with revenues ranging from $5 million to $500 million.

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