Closing the Year-End Books in a Construction Company: A Detailed Guide to Preparing Accurate Financials for Your Business Tax Return

The year-end close for a construction company is more complex than for most other industries. Unlike standard businesses that record revenue at the point of sale, construction firms must navigate percentage-of-completion accounting, retainage, job costing, subcontractor compliance, multi-state tax exposure, bonding and WIP reporting, and equipment-heavy operations. Because of these unique challenges, closing the books in the construction industry requires a disciplined, multi-step approach to ensure financial statements are accurate and tax filings are compliant.

This post outlines a detailed, step-by-step guide for construction CFOs, controllers, accountants, and owners to properly close the year-end books and prepare all necessary documentation for the company’s business tax return.

1. Finalize All Job Costing for the Year

Construction accounting revolves around job costing. Before you can close the year:

Ensure all job-related costs are fully recorded:

• Labor and labor burden

• Materials (including year-end deliveries not yet invoiced)

• Subcontractor invoices

• Equipment rentals and internal equipment charges

• Change orders and back charges

• Job-specific permits, insurance, and mobilization costs

Perform job cost cleanup by:

• Coding any misclassified expenses

• Closing out completed projects

• Ensuring no open invoices are sitting in generic or overhead accounts

• Reallocating costs from “other” or misc accounts

Accurate job costing is essential because it flows directly into the Work-in-Progress schedule and taxable income calculations.

2. Complete the Work-in-Progress (WIP) Schedule

For most contractors, the WIP schedule is one of the most important year-end documents.

Your WIP must include:

• Contract value

• Approved change orders

• Costs incurred to date

• Estimated cost to complete

• Percent complete

• Overbilling or underbilling

• Recognized revenue and gross profit

Why this matters:

• Tax filings require accurate revenue recognition under tax law

• Bonding companies rely on accurate WIP to assess financial health

• Over/underbilling impacts working capital and taxable income

• Financial statements must match WIP output

A flawed WIP can make a profitable year look weak—or make a struggling year appear stronger than it is. The IRS also reviews WIP for consistency and accuracy, especially under the percentage-of-completion method.

3. Reconcile All Balance Sheet Accounts

A proper year-end close requires reconciling every balance sheet account to external statements or internal documentation. Key accounts include:

Bank and Credit Card Accounts

• Reconcile to December 31 statements

• Verify outstanding checks and deposits

Accounts Receivable

• Confirm outstanding invoices

• Adjust doubtful accounts

• Verify retainage receivable schedules

Accounts Payable

• Ensure all subcontractor and supplier invoices are entered

• Reconcile retainage payable

Loans and Equipment Notes

• Tie balances to lender statements

• Confirm interest expense and principal allocations

Inventory (if applicable)

• Conduct physical count

• Adjust for scrap, obsolete materials, or shrinkage

Prepaid Expenses

• Allocate the correct portion into next year

Balance sheet reconciliation provides the accuracy required for tax filings and financial reporting.

4. Review Subcontractor Compliance and 1099 Requirements

In construction, subcontractors represent a major expense category—and a major risk if compliance is not handled properly.

Ensure you have the following for each subcontractor:

• W-9 on file

• Proof of insurance (general liability and workers’ compensation)

• Signed subcontract agreements

• Payment applications and lien waivers

• Year-to-date payment totals

Prepare 1099-NEC filings for:

• Subcontractors

• Self-employed laborers

• Vendors paid for professional services or rent

The IRS scrutinizes subcontractor payments, especially in construction; incomplete documentation can trigger penalties.

5. Complete Payroll and Labor Burden Reconciliation

Because labor is a major job cost driver, payroll accuracy is critical.

Verify:

• All payroll periods through year-end are posted

• Bonuses are recorded in the proper period

• Overtime and prevailing wage adjustments are accurate

• Employer taxes, workers' compensation, and union benefits agree to supporting schedules

Reconcile labor burden accounts:

• FICA

• FUTA/SUTA

• Workers’ comp premiums

• Health insurance and retirement contributions

Labor burden must reconcile to what was applied to job costs throughout the year.

6. Update Fixed Assets and Equipment Costing

Construction companies often own substantial equipment. Year-end preparation includes:

Fixed Asset Review

• Record new equipment purchases

• Remove sold, scrapped, or traded assets

• Update depreciation schedules

• Review Section 179 or bonus depreciation eligibility

Equipment Costing Review

• Verify internal equipment charges were properly applied to jobs

• Reconcile equipment maintenance and repair expenses

• Ensure accurate tracking for heavy equipment fleets

Improper equipment accounting can distort both job profitability and tax depreciation.

7. Prepare Sales Tax, Use Tax, and Multi-State Tax Reporting

Contractors frequently operate across multiple jurisdictions. At year-end:

• Reconcile sales tax payable

• Calculate use tax for materials purchased out of state

• Review nexus and filing requirements for states where work occurred

• Ensure payroll withholding matches state rules

Tax return preparation requires accurate reporting across all states of operation.

8. Verify Retainage Balances

Retainage affects both cash flow and taxable income.

At year-end:

• Confirm retainage receivable by job

• Confirm retainage payable to subcontractors

• Reconcile retainage accounts to WIP schedules

Many contractors mistakenly recognize retainage as earned revenue prematurely—or fail to accrue retainage owed to subcontractors.

9. Perform Overhead Allocation and Burden Rate Review

Year-end is the time to:

• Recalculate actual overhead

• Compare applied overhead to actual results

• Adjust allocation methods if needed

• Reassess burden rates for labor and equipment

These calculations influence both current-year reporting and next year’s budgets.

10. Ensure All Year-End Adjustments Are Completed

Before preparing tax documents, ensure all adjusting entries are recorded:

• Accrued expenses (utilities, interest, payroll, bonuses)

• Prepaid expenses

• Inventory adjustments

• Bad debt expense

• Depreciation

• Revenue adjustments based on WIP

These adjustments create financial statements that accurately reflect economic reality.

11. Assemble Documentation for the Tax Preparer or Internal CPA

Once the books are closed, gather all supporting documentation needed for the tax return.

Key documents include:

Financial Documents

• Year-end balance sheet

• Income statement (profit and loss)

• Statement of cash flows

• General ledger detail

• Trial balance

Construction-Specific Documents

• Year-end WIP schedule

• Job costing detail by project

• Completed contract list

• Retainage schedules

• Equipment depreciation schedules

Payroll and Compliance Reports

• W-2s and W-3

• 1099-NEC and 1096

• Payroll tax filings

• Workers’ compensation audit records

Legal and Loan Documents

• Loan statements

• Equipment financing agreements

• Lease contracts

Corporate Structure Items

• Ownership changes

• Minutes (if required)

Providing complete documentation reduces tax preparation time and prevents amended returns.

12. Review Construction Tax Method Requirements

The IRS has special rules for construction companies, especially those with revenue over certain thresholds.

Confirm which method applies:

• Percentage-of-completion (P.O.C.)

• Completed-contract method

• Cash method (for small contractors under allowable thresholds)

• Hybrid method

The chosen tax method affects:

• Revenue recognition

• Taxable income

• Timing of deductions

• WIP reporting

This is one of the most critical tax planning decisions for contractors.

13. Conduct a Tax Planning Review Before Filing

Before submitting the tax return:

• Estimate tax liability

• Review depreciation strategies

• Analyze potential deferral or acceleration opportunities

• Confirm S-corp reasonable compensation

• Evaluate benefits plans (HSAs, retirement contributions, fringe benefits)

• Verify eligibility for tax credits

Proper planning can reduce taxes significantly.

14. Prepare Internal Financial Statements for Bonding and Banking

Your tax return is not the only deliverable—construction companies must also provide:

• CPA-reviewed or audited financial statements

• Year-end WIP

• Key ratio calculations (working capital, equity, debt-to-equity)

A clean close improves:

• Bonding capacity

• Loan terms

• Credibility with financial partners

Conclusion: A Strong Year-End Close Protects Your Company and Creates a Clean Starting Point for the New Year

Closing the books in a construction company is more than a compliance task—it is a strategic function that affects:

• Tax liability

• Bonding approvals

• Cash flow forecasting

• Profitability analysis

• Job performance

• Strategic planning

• Long-term growth

A construction company that performs a disciplined, accurate year-end close gives itself a competitive advantage. Clean financial data improves decision-making, while organized documentation ensures a smooth tax filing process.

A strong year-end close is the foundation for a successful new year.