Accrual vs. Cash Accounting: What's the Difference for Contractors?
By BRIX Editorial Team · Updated
Cash accounting records income when payment arrives and expenses when you pay them. Accrual accounting records income when you earn it, usually when you invoice, and expenses when you incur them, regardless of when cash moves. Cash is simpler; accrual shows true job profitability. Many small contractors can choose either for taxes, subject to IRS rules.
Key takeaways
- Cash basis follows the bank account. Accrual basis follows the work.
- Per IRS Publication 538, C corporations and partnerships with a C corporation partner generally can't use the cash method unless they pass the gross receipts test, which is $32 million for tax years beginning in 2026.
- Long-term construction contracts have their own tax rules under IRC §460. Residential contracts and short contracts of smaller contractors are generally exempt from the percentage-of-completion requirement.
- You can keep management books on accrual and file taxes on cash. QuickBooks lets you run reports either way.
- Changing your tax accounting method usually requires IRS consent (Form 3115). Talk to a CPA first.
How do cash and accrual accounting record the same job?
The difference is timing. Take one job and follow it through both methods.
| Cash basis | Accrual basis | |
|---|---|---|
| Income recorded | When payment is received | When earned (usually when invoiced) |
| Expenses recorded | When paid | When incurred (when you receive the goods, service or bill) |
| Accounts receivable and payable | Not on the P&L | Tracked on the balance sheet |
| Job profitability | Distorted when payments and costs fall in different months | Matches income and costs to the job and period |
| Effort | Simpler; follows the bank | More work; needs bills and invoices entered on time |
| Who prefers it | Very small shops focused on simplicity | Banks, surety companies, buyers and owners managing by job |
Can my contracting business use the cash method for taxes?
Often yes, but it depends on your entity type, revenue and whether you carry inventory. IRS Publication 538 says the following generally cannot use the cash method: a C corporation, a partnership with a C corporation as a partner, and a tax shelter. A corporation or partnership (other than a tax shelter) can generally use the cash method anyway if it meets the gross receipts test: average annual gross receipts for the three prior tax years at or below an inflation-indexed limit.
| Tax years beginning in | Average annual gross receipts limit (3 prior years) | Source |
|---|---|---|
| 2025 | $31 million | IRS Instructions for Schedule C (2025) |
| 2026 | $32 million | IRS Rev. Proc. 2025-32, section 4.30 |
Inventory adds a wrinkle. The 2025 Schedule C instructions say that unless you're a small business taxpayer, you must use an accrual method for purchases and sales of inventory items. Small business taxpayers (those meeting the gross receipts test and not tax shelters) can choose not to keep an inventory and instead treat it as non-incidental materials and supplies. Most service contractors who buy materials for specific jobs fall into this group, but check with your CPA if you stock a warehouse.
What about long-term construction contracts?
Long-term contracts, ones that start in one tax year and finish in another, follow IRC §460. The default rule is that taxable income from a long-term contract is figured with the percentage-of-completion method, measured by costs incurred compared with total estimated costs. Section 460(e) exempts two kinds of construction contracts from that requirement:
- Residential construction contracts. A 2025 law (Pub. L. 119-21) changed this exemption from "home construction contracts" (generally buildings with four or fewer dwelling units) to the broader "residential construction contracts," for contracts entered into in tax years beginning after July 4, 2025.
- Other construction contracts of smaller contractors, if the contract is expected, when signed, to be completed within two years of the start date, and the contractor meets the §448(c) gross receipts test ($32 million for 2026) for the year the contract is entered into.
Exempt contracts can use other permissible methods, and which one fits is a question for your CPA. Most service, repair and replacement work isn't a long-term contract at all, because it starts and finishes in the same tax year.
Book accounting vs. tax accounting
Your tax method and your management books don't have to match. Plenty of contractors file taxes on the cash basis but run their business from accrual reports, because accrual is the only way to see whether each job made money. Financial statements prepared under GAAP follow ASC 606 (Topic 606, Revenue from Contracts with Customers), whose core principle is to recognize revenue as you transfer goods or services to the customer. For construction work that transfers over time, that typically looks like percentage of completion. Banks and surety companies that ask for financial statements and a WIP report usually want accrual numbers.
Which method should a contractor use?
| Business type | What usually works | Why |
|---|---|---|
| Solo or small residential service (HVAC, plumbing, electrical repair) | Cash for taxes; review accrual reports monthly | Most jobs are paid on completion, so the two methods rarely differ much |
| Cleaning, pest control, lawn care routes | Cash for taxes | Recurring small invoices paid quickly |
| Roofing and remodeling with multi-week jobs | Accrual books for management | Costs and payments often land in different months |
| Commercial subcontractors and GCs | Accrual books, WIP reporting; tax method chosen with a CPA | Banks, sureties and GCs ask for accrual statements; retainage and progress billing make cash basis misleading |
| Any business planning to borrow, bond or sell | Accrual | Lenders and buyers want to see earned revenue and liabilities |
How do you switch between cash and accrual in QuickBooks?
QuickBooks Online records invoices and bills the same way either way. The accounting method only changes how reports are calculated. You can set a default method in your company's account settings and switch any report (such as the profit and loss statement) between cash and accrual when you run it. That makes it easy to manage on accrual and hand your tax preparer cash-basis reports. Changing the report view does not change your tax method; that's a separate IRS process.
Common mistakes
- Mixing methods by accident. Recording deposits as income when received, but entering supplier bills on accrual, gives a P&L that's neither.
- Judging months on cash basis. A slow-paying month can look like a loss even when work was profitable. Look at accrual reports to judge performance.
- Not entering bills. Accrual reports are only as good as the supplier bills entered. Unentered bills make jobs look more profitable than they are.
- Switching tax methods without paperwork. Changing your tax method generally needs IRS consent. Don't just start reporting differently.
- Ignoring growth. If you're approaching the gross receipts limit or forming a C corporation, review your method with a CPA before year-end.
Frequently asked questions
Is cash or accrual better for a small contractor?
For taxes, many small contractors use the cash method because it's simpler and taxes income only when collected. For running the business, accrual is better because it shows each month's and each job's true profit. Many owners use both: cash for the tax return, accrual for management reports.
Who is required to use accrual accounting?
Per IRS Publication 538, C corporations, partnerships with a C corporation partner and tax shelters generally can't use the cash method. Corporations and partnerships that aren't tax shelters can use it if they meet the gross receipts test ($32 million average for tax years beginning in 2026). Businesses with inventory that aren't small business taxpayers must use accrual for inventory items.
Can I use cash basis for taxes and accrual for my books?
Yes. Your management reports can use any basis you find useful, while your tax return follows your adopted tax method. QuickBooks lets you run reports on either basis from the same data.
Do contractors have to use percentage of completion for taxes?
Only for long-term contracts that aren't exempt. IRC §460(e) exempts residential construction contracts and other construction contracts expected to finish within two years when the contractor meets the gross receipts test. Larger contractors with long commercial jobs generally must use percentage of completion.
How do I change my accounting method with the IRS?
Generally by filing Form 3115, Application for Change in Accounting Method. Some changes qualify for automatic consent; others go through the IRS's non-automatic request procedures. A CPA or enrolled agent should handle it, because the change can shift income between years.
What is the modified cash basis?
A hybrid used for some financial statements: mostly cash basis, but with certain items such as equipment and loans recorded on an accrual-like basis. It's a reporting choice for statements, not a separate tax method, so ask your accountant whether it fits your lender's requirements.
Related
- What Is the Percentage of Completion Method?How the percentage of completion method works for contractors: cost-to-cost formula, a two-year worked example, IRC §460 tax rules and common mistakes.
- What Is a WIP Report (Work-in-Progress Schedule)?What a construction WIP report is, every column explained, a four-job worked example with over and under billings, how to read it, and mistakes to avoid.
- How to Read a Profit and Loss Statement (Contractor's Guide)How to read a profit and loss statement as a contractor: each line explained, a worked P&L for a plumbing shop, ratios to check monthly, and red flags.
- What Is Accounts Receivable?Accounts receivable explained for contractors: how A/R works, the aging report, turnover formula, worked examples by trade, and how to collect faster.
- What Is Accounts Payable?Accounts payable for contractors: how A/P works with supply houses and subs, DPO formula, early-pay discount math, by-trade examples and common mistakes.
- Bookkeeping Checklist for Contractors (Weekly, Monthly, Year-End)A weekly, monthly, quarterly and year-end bookkeeping checklist for contractors: reconciliations, job costing, A/R review, WIP, estimated taxes and 1099s.
- Taxes for Contractors: The 2026 Guide for Self-Employed Trades OwnersHow taxes work for self-employed contractors in 2026: SE tax, income tax, quarterly estimates, deductions, 1099s and payroll, with IRS sources.
- Bookkeeping for contractors that keeps your books tax-ready all yearContractor bookkeeping that stays current: categorized expenses, 1099 subcontractor tracking, sales tax and quarterly tax reminders, synced to QuickBooks.
- QuickBooks for contractors: the right version, real job costing and a sync that keeps the books matched to the jobsQuickBooks for contractors: Online vs Desktop, job costing with projects and classes, sync pitfalls, and how BRIX keeps QuickBooks matched to your jobs.
- Contractor invoicing software that sends the invoice and chases the moneyTurn finished jobs into invoices the same day, send polite automatic reminders on unpaid ones, and sync invoices and payments to QuickBooks.
Sources
- IRS — Publication 538, Accounting Periods and Methods (checked October 12, 2026)
- IRS — Rev. Proc. 2025-32 (2026 inflation adjustments), section 4.30 (checked October 12, 2026)
- IRS — 2025 Instructions for Schedule C (Form 1040) (checked October 12, 2026)
- 26 U.S.C. §460, Special rules for long-term contracts (Cornell LII) (checked October 12, 2026)
- FASB — Post-Implementation Review, Revenue from Contracts with Customers (Topic 606) (checked October 12, 2026)