What are the different bases of accounting available to construction contractors and how does this save in taxes?
There are numerous bases of accounting (or different definitions of income) allowed for construction contractors. They are cash basis, accrual basis, completed contract basis, and percentage of completion basis. Each of these methods calculate income based on the accumulation of certain assets and excluding others. The cash basis, as its name implies, calculates income based on the accumulation of cash over the previous twelve-month period. Therefore, under the cash basis, accounts receivable, retainage, work in progress, and prepaid assets are not considered to be a part of income for tax purposes. Because of the nonrecognition of so many assets, it is common for a contractor to show a significant income for financial statement purposes and to show a loss for tax purposes. For this reason, the cash basis is a very attractive method for those contractors that can qualify to use it. To qualify for use of the cash method, the contractor cannot maintain significant inventory, cannot have
