The cash method of accounting is one of the two main methods that businesses can use. The cash method can be used by some construction contractors.
In order to use the cash method, you must have average gross receipts of less than $25M, the new tax law in Dec 2017 expanded the use of cash method so more contractors can take advantage of it. Often contractors use the cash method when they are just starting out. It can be a great way to control your income since expenses can be paid and receipts delayed at year-end.
Using the cash method would be all peaches and cream except for one thing – AMT. The cash method for long-term contracts is not allowed for AMT purposes. If you use the cash method there will be an adjustment for AMT for the difference between the cash and percentage of completion methods. The AMT always uses the percentage of completion method except for home builders, that’s just the way it is. This can lead to huge swings in and out of AMT for taxpayers with long term contracts that use the cash basis method of accounting. Planning gets a bit trickier with the huge swings in AMT which can create AMT credits to use in future years. But it can still work out if you are careful with your planning and keep an eye on the income calculated on a percentage of completion method.
With the new tax bill in Dec 2017 the swings in AMT might be reduced because of the higher AMT exemptions and the lower regular tax brackets, but construction contract adjustments are often large enough that AMT will still come into play.
Chris Wittich, CPA