Don’t Wait Until December 31st: How Smart Contractors Legally Defer Taxes Without Getting Burned

By Wade L Carpenter, CPA, CGMA | August 22, 2023

It’s December 28th, and you’re sitting in your truck outside a jobsite, staring at your phone calculator. Your accountant just called with the news—you owe Uncle Sam enough money to buy a new excavator. “Can we defer some of this?” you ask desperately.

That’s like asking your concrete crew to pour footings after the walls are already up. Sure, it’s theoretically possible, but you’re not going to like the results.

Here’s the truth most contractors learn the hard way: tax planning is like building a house—you need the right foundation, the right tools, and the right timing. Start with a cracked foundation or the wrong tools, and your whole structure collapses when the inspector (in this case, the IRS) shows up.

Know Your Tax Method or Get Played by Your Own Books

Before you can defer a single dollar, you need to know what game you’re playing. Most contractors couldn’t tell you their accounting method if their bonding company depended on it—and sometimes it does.

Find your method fast: Dig out last year’s tax return and look for the little checkbox that says what accounting method you’re using. You’ll see cash basis, accrual, completed contract, or percentage of completion. This isn’t just paperwork—this box determines every tax move you can legally make.

Here’s where it gets interesting: Many CPAs put contractors on accrual method when they could legally stay on cash basis up to $29 million in revenue. Why does this matter? Because cash basis gives you way more control over when you pay taxes.

Think of it this way: trying to use cash basis tax strategies when you’re on accrual method is like trying to frame a house with plumbing tools. The tools aren’t broken—they’re just wrong for the job.

The Million-Dollar Mistake

I’ve seen contractors lose serious money because they assumed their CPA understood construction accounting. One GC I know spent three years deferring income using completed contract method, only to discover his accountant had him on percentage of completion the whole time. The IRS adjustment? Six figures, plus penalties.

Know the game before you play it. Your accounting method isn’t a suggestion—it’s the law until you officially change it.

Cash Basis: The Simple Game with Simple Traps

If you’re on cash basis (and most smaller contractors should be), you’ve got the most flexibility. But like operating a crane, just because it’s powerful doesn’t mean it’s foolproof.

The golden rule: You can delay billing, but don’t mess with depositing. Hold off on sending December invoices until January 2nd? Smart move. Playing games with checks that arrive December 30th? That’s audit bait.

Here’s your back-of-the-napkin playbook:

Accelerate expenses: Use the credit card rule to your advantage. Expenses charged before year-end count even if you haven’t paid the credit card bill yet. Need materials for January jobs? Buy them in December. Planning equipment maintenance? Schedule it before New Year’s.

But avoid the red flag pattern: Don’t deposit zero dollars in November and December, then dump $2 million on January 2nd. That screams “manipulation” to the IRS louder than a jackhammer at 5 AM in a residential neighborhood.

The Cash Flow Reality Check

Here’s the trap most contractors fall into: they defer so much income to next year that they can’t make payroll in February. I call this the “January famine”—you’ve got all this income coming, but your bills are due now.

Plan for survival until March. If you defer all your December billing, make sure you can cover payroll, insurance, and equipment payments for 90 days. Because even if your clients pay fast (and when do they ever?), you’re looking at 60-90 days before that deferred income hits your account.

Completed Contract: The Double-Edged Sword That Can Cut You

Completed contract method is like dynamite—powerful when used correctly, devastating when it goes wrong.

The basic idea: you don’t pay taxes on profit until the job is 100% complete. Sounds great, right? Here’s where contractors get burned.

You can’t fake completion. I’ve seen contractors try to claim a 98% finished job isn’t complete just because they haven’t collected retainage. The IRS isn’t buying it. If you’re doing punch list items and the owner’s moved in, that job is done for tax purposes.

The Profit Dump Disaster

Here’s the scenario that destroys contractors: You defer income on three big jobs for two years. Then all three finish in the same tax year. Suddenly, you’re paying taxes on $3 million in profit with almost no offsetting expenses because your current year costs went to jobs that aren’t finished yet.

One contractor I know had this happen during the 2008 recession. Multiple jobs finished just as new work dried up. He owed taxes on massive deferred profits but had no cash flow to pay them. The business didn’t survive.

Remember: you’re not avoiding taxes, you’re just moving the payment date. Make sure you’ll have cash when that bill comes due.

Percentage of Completion: Know Where You Really Stand

If you’re on percentage of completion (and most bigger contractors are), your billing schedule doesn’t matter for taxes. You pay based on job progress—costs incurred versus total estimated costs.

This creates a weird disconnect. You might bill $500K on a job but only recognize $300K for taxes because the job’s only 60% complete based on costs. Or worse—you might recognize $800K in taxable income on that same $500K billing if your job cost estimates were too high.

The tracking nightmare: Many contractors run cash-based operations but get hammered by percentage-of-completion tax surprises because they don’t track job progress accurately. It’s like driving at night without headlights—you don’t see the cliff until you’re already falling.

The Manipulation Myth

Unlike other methods, percentage of completion is hard to game. You can’t just delay billing to defer taxes—your tax liability is based on work completed, not payment timing.

But here’s what you can control: your cost estimates and change order management. More accurate estimates mean fewer tax surprises. Better change order tracking means you recognize income when you’ve actually earned it.

Timing Is Everything: Plan in October, Not December

Here’s the brutal truth: 99% of your tax planning options disappear after December 31st. Waiting until January 2nd to think about taxes is like ordering materials after the foundation is poured—technically possible, but you’re not going to like the cost or the delays.

Smart contractors start tax planning in October. Why? Because you need time to:

  • Analyze your year-to-date position: Where do you really stand profit-wise?
  • Project fourth-quarter income: What jobs will finish? What billing is coming?
  • Plan legitimate deferrals: Which strategies make sense for your specific situation?
  • Coordinate with bonding and banking: Make sure your tax moves don’t make your financial statements look like a train wreck.

The Bracket Reality

Sometimes it’s smarter to pay some tax this year rather than dump everything into next year’s higher bracket. If you’re at the edge of a tax bracket and expecting a big year ahead, taking some income now might save money long-term.

Back-of-the-napkin math: If you’re in the 22% bracket this year but expect to be in the 32% bracket next year, paying tax on an extra $100K now saves you $10,000 compared to deferring it.

The Bottom Line: Don’t Play Russian Roulette with the IRS

Tax deferral isn’t magic—it’s strategic timing backed by solid planning and legitimate business reasons. But like any powerful tool, it can hurt you if used incorrectly.

The contractors who succeed at tax deferral follow three rules:

  1. Know your accounting method and play by its rules
  2. Start planning in October, not December
  3. Always plan for the cash flow impact of your decisions

Remember, the IRS has seen every trick, every scheme, and every “creative interpretation” of the tax code. They’re not impressed by your December 31st panic moves. But they do respect legitimate business strategies executed with proper planning and documentation.

The key takeaway? Tax deferral is like any other aspect of running a construction business—success comes from understanding the rules, using the right tools, and planning ahead. Do it right, and you can legally reduce your tax burden while maintaining healthy cash flow. Do it wrong, and you’ll be explaining your “strategy” to an IRS auditor who’s heard it all before.

Don’t wait until December 31st to figure this out. Your future self—and your bank account—will thank you.

Ready to build a smarter tax strategy for your construction business? Listen to the full episode of the Contractor Success Forum at https://contractorsuccessforum.com/ or subscribe on YouTube, Spotify, or Apple Podcasts. For personalized construction accounting and tax planning, contact Wade Carpenter, CPA at https://carpentercpas.com.