Construction and Contractors in Austin

A construction accountant in Austin works in a world a general small-business accountant rarely visits, and in a boom market where a contractor may run five or six jobs at once, the difference between construction-grade books and generic ones shows up fast. The core reason is that construction income does not arrive in tidy monthly chunks tied to when work is performed. A single contract can run eighteen months, cross two or three tax years, involve progress billings that lag the actual work, and end with a slice of money held back as retainage. An accountant who records revenue when the invoice is paid produces numbers that are not just imprecise but actively misleading for an Austin contractor, even though Texas has no state income tax, because the federal return, the franchise tax margin, and the bonding package all depend on the right figures.

The first thing a construction accountant does differently is job costing. Instead of one company-wide profit and loss, we track cost and revenue at the level of each individual job, so labor, materials, subcontractor payments, and equipment are coded to the specific contract they belong to. This is the only way to know which projects are making money and which are quietly losing it, and in a boom it is the only way to keep several simultaneous jobs from blurring into one number that hides the loser. The second is the work-in-progress schedule, which compares costs incurred and amounts billed against the total contract value to reveal whether each job is overbilled or underbilled. The third is the tax accounting method, because long-term contracts fall under Section 460 and its percentage-of-completion rules rather than the simple cash or accrual approach most small businesses use.

Here is a worked example of why it matters. Suppose an Austin contractor has a 1,000,000 dollar contract and by year-end has incurred 600,000 dollars of the estimated 800,000 dollars in total cost. That job is 75 percent complete by cost, so under percentage-of-completion the contractor recognizes 750,000 dollars of revenue and 600,000 dollars of cost this year, for 150,000 dollars of gross profit, even though the owner has been billed only 500,000 dollars so far. A regular accountant booking the 500,000 dollars billed would understate income by 250,000 dollars and hand the contractor a federal return that does not match the method the law requires. Texas takes no income tax on top, but the misstatement still distorts the federal return and can throw off the franchise-tax margin for a contractor over the threshold.

Beyond the numbers, a construction accountant here understands the surrounding world, Texas sales and use tax on materials and the lump-sum versus separated contract distinction, the franchise tax and its cost-of-goods deduction for contractors, retainage and prompt-payment rules, subcontractor 1099 reporting, and the bonding relationship that depends on financial statements a surety will accept. We coordinate all of it through our bookkeeping service so the job cost, the WIP schedule, and the tax return draw from the same reliable data. The Texas Comptroller franchise tax rules and Section 460 set the framework, but neither tells a contractor how to run the books so the tax method, the bank, and the bonding company all see the same trustworthy picture. That is the working job, and getting it right saves an Austin contractor from the expensive restatement a generalist leaves behind when a bonding renewal lands mid-boom and the statements will not support the capacity you need.

Most small Austin construction contractors file a Texas franchise tax report but owe nothing on it, and understanding exactly where the tax starts is one of the first things a construction accountant clarifies. Texas has no state personal income tax, so your construction profit is not taxed at the individual level. What Texas has instead is the franchise tax, sometimes called the margin tax, which applies to most business entities doing business in the state, including LLCs, corporations, and limited partnerships. The key number is the no-tax-due threshold. When your total revenue falls at or below roughly 2.47 million dollars, you owe no franchise tax, and in recent years the state has moved toward not even requiring a report from entities below the threshold, though many still file to keep their status current. So a large share of Austin contractors are in the report-but-owe-nothing zone.

Once revenue climbs above the threshold, the franchise tax is computed on your taxable margin, not on gross revenue, which is where a construction accountant adds value. Margin is generally the lowest of a few calculations, total revenue minus cost of goods sold, total revenue minus compensation, total revenue times 70 percent, or total revenue minus a standard fixed percentage. For a contractor, the cost of goods sold deduction is often the most favorable because construction labor and materials can qualify, and Texas has specific rules allowing contractors to include certain construction costs in COGS. Choosing the right margin calculation can meaningfully lower the tax.

Here is a worked example. Suppose your construction business does 4,000,000 dollars in total revenue, above the threshold, with 2,600,000 dollars of qualifying cost of goods sold. Your margin under the COGS method is 1,400,000 dollars. The franchise tax rate for most entities is 0.75 percent, though a lower 0.375 percent rate applies to qualifying wholesalers and retailers, which most contractors are not. At 0.75 percent on a 1,400,000 dollar margin, the franchise tax is about 10,500 dollars. Had you used the 70 percent of revenue method instead, your margin would be 2,800,000 dollars and the tax about 21,000 dollars, so the COGS calculation saves roughly 10,500 dollars in this case. That is the kind of difference the right method makes.

We handle the franchise tax through tax strategy consulting and the return preparation, testing each margin method against your actual numbers and making sure your construction costs are captured in COGS where the rules allow. The Texas Comptroller franchise tax page lays out the threshold, the rates, and the margin calculations, and we apply them to your revenue and cost mix. The practical point is that the franchise tax is not something to fear at the small end, where most Austin contractors owe nothing, but once the boom pushes your revenue past the threshold it becomes a real number that rewards careful margin planning, so we watch your revenue trend and prepare for the crossover before it arrives rather than after. We also structure the entity and the books ahead of that crossover so the cost-of-goods margin method is available and fully supported the first year you owe the tax, because a contractor who only starts tracking construction costs for COGS once the franchise tax bites has usually lost the documentation that would have made the cheaper margin method defensible.

Texas sales and use tax on construction is one of the areas Austin contractors get wrong most often, because Texas ties the tax treatment to how the contract is written, and a construction accountant has to get the contract type right before a single invoice goes out. Texas charges 6.25 percent state sales tax, and local jurisdictions in and around Austin add their own rates, pushing the combined rate higher. The complication is not the rate, it is whether you, the contractor, owe the tax on materials or whether you collect it from the customer, and that turns on whether the contract is lump-sum or separated.

Under a lump-sum contract, you charge the customer one bundled price for the whole improvement without separately stating materials and labor. In that case Texas generally treats you as the consumer of the materials, so you owe sales or use tax on what you pay for the materials, and you do not charge the customer sales tax on the contract. Under a separated contract, you state the charge for materials separately from labor. In that case you are treated as a retailer of the materials, so you collect sales tax from the customer on the materials portion and can buy those materials tax-free for resale, while your labor on a new construction or residential repair job may be treated differently than on a commercial remodel. The distinction determines your entire compliance posture on the job.

A worked example makes it concrete. Suppose a job uses 100,000 dollars of materials and 150,000 dollars of labor. Under a lump-sum contract you bill 250,000 dollars flat, you owe tax on the 100,000 dollars of materials you purchased, roughly 8,250 dollars at an 8.25 percent combined Austin rate, and you charge the customer no sales tax. Under a separated contract you bill materials and labor separately, buy the 100,000 dollars of materials tax-free for resale, and collect the roughly 8,250 dollars of tax from the customer on the materials line instead. The cash and paperwork flow differently, and if you write the contract one way but handle the tax the other, a Texas audit will find the mismatch and assess the difference plus penalty and interest.

There are further wrinkles for new construction versus remodeling of nonresidential real property, where labor itself can become taxable on a separated commercial remodel, so the type of work matters alongside the contract form. We build the correct sales-and-use-tax handling into your bookkeeping and returns through payroll compliance and the broader engagement, matching the contract structure to the tax treatment, tracking taxable material purchases, and accruing use tax where you bought materials untaxed. The Texas Comptroller sales and use tax guidance lays out the lump-sum and separated rules and the treatment of new construction versus remodeling, and we apply them to how your contracts are actually written, because in Texas the contract language and the tax handling have to agree or the exposure builds silently until an auditor reconstructs it. On larger projects we review the contract form with you before it is signed, because switching a job from lump-sum to separated after the fact is far harder than choosing the right structure at the start, and the choice changes not just who remits the tax but your cash flow on every draw.

Choosing a revenue recognition method is one of the most consequential decisions an Austin construction accountant makes, and it is governed by law rather than left to preference, though in Texas the income-tax side of the analysis is entirely federal because there is no state income tax. The starting point is Section 460, which requires most long-term contracts, meaning construction contracts not completed within the tax year they begin, to use the percentage-of-completion method. Under that method income is recognized as the job progresses, measured by costs incurred to date against the total estimated cost. The completed-contract method, which defers all revenue and profit until the job finishes, is available only in specific situations rather than as a free choice.

The main exception is the small-contractor exemption. A contractor whose average annual gross receipts for the three prior tax years fall at or below the threshold, which the 2025 law raised to 45 million dollars for contracts entered into in tax years beginning after 2025, may use completed-contract for contracts expected to finish within two years. Home construction contracts get their own carve-out and can use completed-contract regardless of size. So the first job of an Austin construction accountant is to determine which methods the contractor is even eligible to use, based on receipts and the type of work, before any planning begins.

Once eligibility is clear, the choice becomes primarily a federal planning decision, with a Texas franchise-tax angle for larger contractors. Consider a contractor eligible for both methods with a large job starting in November and finishing the following August, carrying 400,000 dollars of total profit. Under percentage-of-completion, if the job is 20 percent complete by December 31, the contractor pulls 80,000 dollars of profit into year one, taxable now at the federal rate. Completed-contract defers the entire 400,000 dollars into year two. If the contractor expects a lower federal bracket next year, or simply wants to defer the federal cash outflow, completed-contract saves real money on the timing. Because Texas has no income tax, the income-tax side turns on the federal brackets and cash position across the two years, but for a contractor over the franchise-tax threshold, how and when revenue is recognized can also shift the margin computation, so the method choice carries a secondary Texas effect that a contractor in a no-tax-at-all state would not have.

There is a catch worth flagging. Even a contractor using completed-contract for regular tax often has to use percentage-of-completion for the federal alternative minimum tax on many contracts, which can erase part of the deferral benefit. A construction accountant runs both scenarios, including the AMT effect and the franchise-tax margin, before committing. We do this modeling through tax strategy consulting, weighing the contractor’s receipts history, the mix and length of current contracts, the expected federal brackets across years, the franchise-tax position, and the bonding relationship, then choosing the method that produces the best overall outcome. The Texas Comptroller franchise tax rules govern the margin effect, and changing a method later requires IRS consent on Form 3115, so we get the choice right up front rather than paying to unwind it. Because the exemption is tested each year against a rolling three-year receipts average, a growing Austin contractor can cross the threshold and lose completed-contract mid-boom, so we watch receipts annually and warn before the method is gone.

Two areas deliver concrete dollars for an Austin contractor, subcontractor reporting done right and equipment expensing timed well, and a construction accountant handles both cleanly because Texas has no state income tax to complicate the depreciation side. Start with subcontractors, because contractors pay more of them than almost any other business, and in a boom labor market where subs are stretched across many jobs the volume of 1099s climbs. The headline change for 2026 is the reporting floor. For payments made during 2026, the threshold for issuing a Form 1099-NEC rose from 600 dollars to 2,000 dollars, so you file the form for any subcontractor paid 2,000 dollars or more across the year, which on a real Austin project is nearly every sub. The change trims paperwork on tiny payments but does nothing to relieve the duty to report the income or the far larger issue of worker classification.

The single most important habit is collecting a signed Form W-9 from every subcontractor before the first payment goes out, capturing the legal name, tax ID, and entity type you need to issue a correct 1099 in January. Chasing a tax ID after a job closes is a recurring nightmare, and a missing or wrong number can trigger backup withholding and penalties. Worker classification is the deeper risk. If you treat a worker as a 1099 sub when the facts, control over the work, tools provided, no ability to serve other customers, say the person is a W-2 employee, the exposure includes back federal payroll taxes and penalties. Texas does not force most private employers to carry workers compensation, which is unusual, but that does not soften the federal payroll-tax exposure from misclassification, and going without workers comp carries its own liability tradeoff on a job site. A worked example. Pay a crew leader 60,000 dollars over the year as a 1099 sub, and if reclassified as an employee you could owe the employer share of payroll tax, roughly 7.65 percent of 60,000 dollars, about 4,590 dollars, plus penalties and the tax that should have been withheld, and that is for one worker.

On equipment, the 2026 federal rules are generous and Texas keeps the income-tax side clean. One hundred percent bonus depreciation is permanent again for qualifying property placed in service after early 2025 under Section 168(k), so a 200,000 dollar piece of equipment placed in service before December 31 is fully deductible on the federal return, worth roughly 64,000 dollars at a 32 percent combined marginal rate in the year of purchase. Section 179 runs alongside with a 2.5 million dollar limit for 2026. Because Texas does not tax personal income, there is no state addback and no separate Texas depreciation schedule to keep for a pass-through owner, so the full federal deduction is the whole income-tax benefit. The one Texas interaction is the franchise tax, where equipment and materials costs can feed the cost-of-goods margin for a contractor over the threshold, so we coordinate the two. We run the classification analysis and the reporting through payroll compliance and the equipment timing through tax strategy consulting, placing major purchases in your highest-income years so the federal deduction lands where it saves the most. The IRS guidance governs the look-back on completed long-term contracts, and keeping the federal timing sharp is the core of the planning for a busy Austin contractor.