What is the gross receipts threshold for the small contractor exception in 2026?

$32,000,000 of average annual gross receipts over the three prior tax years, for tax years beginning in 2026. Meeting it is not enough on its own - the contract must also be expected to finish within two years of the date work begins. Both tests have to be cleared, and the dollar figure adjusts for inflation each year.

Does California's 5% retention cap apply to every private contract I sign?

No. Civil Code section 8811 caps retention at 5% of the contract price on private California projects entered into on or after January 1, 2026, but there are two exceptions. Certain residential projects are excluded. The cap also does not apply where a subcontractor was given written notice at bid time that a performance-and-payment bond would be required and then failed to provide one.

Do I pay sales tax on materials, or charge my customer sales tax?

Both, depending on what you install. Under CDTFA Regulation 1521 you pay sales tax when you buy materials, and you collect it from your customer on fixtures - items like furnaces and cabinets that keep their identity when installed. If the contract states a selling price for the fixture, tax applies to that price; otherwise the measure is your cost. Installation labor is not taxed.

California Construction & Contractor Accounting

Construction CPA for California Contractors

Your bonding company reads your work-in-progress (WIP) schedule - the job-by-job report of what every open project has cost, earned and billed - before it decides how much work it will bond. Your accounting method decides how much profit lands on this year's return. We handle both from Rancho Cucamonga for contractors across the Inland Empire, and we prepare business and personal returns for all 50 states. AJ Singh, CPA and Enrolled Agent - federally authorized to represent taxpayers before the IRS.

Schedule a 20-minute consultation

$32M

2026 gross receipts ceiling for the small-contractor exception under IRC 460

Retention cap on private California contracts signed on or after January 1, 2026

2 years

How fast a job must be expected to finish to qualify for the small-contractor exception

All 50 states

Business and personal returns prepared and filed - California is home base

What does a surety actually read on my WIP schedule?

A surety underwriter - the person at the bonding company who sets your limits - reads a WIP schedule for three things. Fade: how far today's expected profit on a job has fallen from the original estimate. Underbilling: a nearly finished job you have not fully billed, which usually means a cost overrun nobody has invoiced. Overbilling: billing ahead of the work, which is cash borrowed from the next job. Your WIP schedule either answers all three or raises them.

Is this you?

Six situations that bring contractors to us

Your surety wants a reviewed statement and a clean WIP

The underwriter asked for a WIP schedule and CPA-prepared financial statements, and your job list is a spreadsheet nobody has matched to your books. We rebuild both so the package answers the underwriter's questions instead of raising new ones.

You are signing 2026 contracts under the new retention rules

Retention on private California contracts signed on or after January 1, 2026 is capped at 5% of the contract price, with two exceptions. Less cash stuck in retention means more working capital - the number your bonding line moves with.

You pay subs on 1099s and the EDD has opened an inquiry

One former worker filing an unemployment claim can put your whole subcontractor list under review. Construction subs are judged under Labor Code 2781 and the older Borello factors, not the ABC test - but only if your paperwork supports it.

You bid public works and certified payroll is behind

Certified payroll - the weekly report of every worker's hours and wages on a public job - has to match your books and the labor line in your WIP. When it does not, an auditor finds the gap before you do.

CDTFA says you owed sales tax on what you installed

Materials and fixtures are taxed differently, and the line between them is easy to get wrong. Get it wrong once and you repeat the same error on every job until an auditor adds it all up.

Send us your WIP schedule

Method selection under IRC 460

Percentage-of-completion, completed contract, or cash

Any contract you do not start and finish in the same tax year is a long-term contract, and IRC section 460 defaults it to percentage-of-completion - you report profit as the work progresses, not when the job ends. Completed contract - profit reported only when the job closes - and cash are available only through an exception. Here is who qualifies for what.

Scroll the table sideways to compare all three

Percentage-of-completion, completed contract, or cash. Any contract you do not start and finish in the same tax year is a long-term contract, and IRC section 460 defaults it to percentage-of-completion - you report profit as the work progresses, not when the job ends. Completed contract - profit reported only when the job closes - and cash are available only through an exception. Here is who qualifies for what.
Test or consequence	Percentage-of-CompletionThe IRC 460 default	Most contractors want thisCompleted ContractException required	CashException required
Available on any long-term contract, no qualification needed	Yes	No	No
Requires the small-contractor exception, IRC 460(e)(1)(B)	No	Yes	Yes
Job must be expected to finish within	No time limit	2 years	2 years
Average gross receipts, prior 3 years	No limit	$32,000,000 (2026)	$32,000,000 (2026)
Also open through the home construction contract exception, IRC 460(e)(6)	Not needed	Yes	Yes
Lost if the entity is a tax shelter - losses flowing mostly to owners who do not work in the business	Not affected	Exception lost at any size	Exception lost at any size
When profit hits the return	As work progresses	When the job closes	When cash comes in
Form 8697 look-back - when a job closes, the IRS recomputes earlier years and charges or refunds interest	Yes	No	No
What your surety sees on open jobs	Earned profit on every job	Nothing until close	Billings and cash only
Typical fit	Over $32M, or jobs past 2 years	Smaller contractors, short jobs	Small jobs, simple billing

What working with us looks like

How we build a WIP schedule and bonding-ready statements

1
Intake call - 20 minutes
You tell us your entity type, contract types, bonding situation, and what your surety, lender or agency is actually asking for. AJ Singh takes this call. No charge, and you get a straight answer on whether we are the right firm for the problem.
2
File and books review - 3 to 5 business days
We read your last filed return, your current WIP, your job cost setup, and your certified payroll if you bid public works. You get a written list of what is off, in plain language, before you commit to anything.
3
Cost code and job structure rebuild
We set up cost codes that match how you actually estimate and bill, then move job cost detail into your books so it stops living in a side spreadsheet. This is the step that makes everything after it possible.
4
Monthly cost-to-finish updates
Every month, your project manager re-answers one question per job: what will it cost to finish? Issued purchase orders and signed subcontracts get tracked against that number, and change orders get logged as approved, pending or disputed.
5
Overbillings and underbillings posted to the books
We calculate what each job has actually earned - costs so far measured against total expected cost - and compare it to what you have billed. The difference is posted to your books, not left on a worksheet, and retention receivable gets its own line.
6
Method and structure decision under IRC 460
We confirm whether the small-contractor or home construction exception lets you use completed contract or cash, whether Form 8697 look-back interest applies, and whether your entity setup and owner pay are helping or hurting the equity your surety underwrites against.
7
Fade review before anything goes to the surety
Any job whose expected profit has dropped meaningfully gets a one-paragraph written explanation attached before the package leaves. Underwriters ask about fade every time. Answering it in the package beats answering it on a phone call two weeks later.
8
Service level and package assembly
We confirm with your agent, in writing, whether the carrier wants a compilation (statements assembled, no testing), a review (limited testing) or a full audit, then build the financial statements, the WIP and the supporting schedules to that level. Audit work is referred out; we prepare you for it.
9
Ongoing - monthly, quarterly, annually
A financial and WIP package on a fixed date each month, a quarterly review of the jobs, and a planning call before year end while there is still time to act on the method, equipment purchases and owner pay.

Diagram showing how a work-in-progress schedule derives earned revenue from costs to date and estimated cost to complete, then compares it to billings to identify overbilling or underbilling.

Bar comparison showing the effect on retention withheld at a 10 percent rate versus a 5 percent rate on an illustrative construction contract. Illustration only, not a client and not a projection.

The California layer

Retention, worker classification, public works and sales tax

National CPA blogs cover IRC 460 and never touch California. California law firms cover these statutes and never touch the accounting. These four issues are where contractor work actually goes wrong, and they are the reason this page exists.

Retention: the 5% cap and its two exceptions

Civil Code 8811 caps retention at 5% of the contract price on private California contracts signed on or after January 1, 2026. Two exceptions: certain residential projects, and a sub who was told at bid time that a performance-and-payment bond was required but never provided one.

Worker classification: Labor Code 2781, not the ABC test

Construction subcontractors are not judged under the ABC test. Labor Code 2781 sends bona fide construction subcontracting to the older, multi-factor Borello test - but only with a written subcontract, a CSLB-licensed sub working within its license, a separate business location, and the other statutory conditions documented.

Public works: DIR registration, prevailing wage, certified payroll

Register with the DIR before you bid - only jobs of $25,000 or less ($15,000 for maintenance) are exempt. Prevailing wage applies to almost any public job over $1,000. Certified payroll, filed weekly through eCPR, must match your books and the labor line in your WIP.

Sales tax: materials versus fixtures under CDTFA Reg 1521

You pay sales tax when you buy materials - lumber, concrete, wire. You collect it from your customer on fixtures - furnaces, cabinets, pumps that keep their identity when installed. CDTFA Regulation 1521 draws the line, and a wrong call repeats itself on every job.

Have us review one signed contract

Who does the work

The people who read your WIP

AJ Singh

Principal, G&S Accountancy Inc

CPA and Enrolled Agent

AJ Singh, CPA and Enrolled Agent - federally authorized to represent taxpayers before the IRS. He takes the first call from every construction client, reads the WIP schedule and the last filed return himself, and settles the IRC 460 method question before anyone touches the books. He also handles what follows when things go wrong: EDD worker classification audits, CDTFA sales tax assessments, and IRS and FTB collection matters. The firm works from one office in Rancho Cucamonga, serves contractors across the Inland Empire, and prepares business and personal returns for all 50 states - the Enrolled Agent license is federal - with deep experience in California, Arizona and New Jersey.

Construction accounting team

Job costing, WIP production and certified payroll

G&S Accountancy Inc, Rancho Cucamonga

The team that runs your month-end close, codes costs to the right job, refreshes cost-to-finish estimates with your project managers, and produces the WIP schedule and financial package your surety reads. Construction work sits alongside the firm's trucking and Inland Empire small-business practice, so the people handling your certified payroll are the same people who see the CDTFA and EDD questions that follow it. The same team supports SSARS review engagements for contractors that have outgrown internally prepared statements, producing a full GAAP financial statement package with an independent accountant's review report.

Who we work with

Contractors we see most in the Inland Empire

General contractors and design-build

Warehouse and distribution build-out drives a large share of Inland Empire construction. The questions are retention, bonding capacity and method selection, and they all run through the WIP. Our financial statement reviews page explains what each statement service level involves.

Specialty subcontractors

Electrical, mechanical, plumbing, concrete and finish trades. The recurring problem: revenue booked when the invoice goes out, so open jobs show nothing and the underwriter has nothing to read. Rebuilding the WIP and the monthly close is usually a one-quarter project.

Heavy civil, grading, excavation and hauling

Construction accounting on one side, motor-carrier compliance on the other - one firm covers both. IFTA quarterly fuel tax filings and the Form 2290 heavy vehicle tax are covered on our trucking and IFTA page, and the same job cost structure carries both.

Public works contractors

DIR registration, prevailing wage, fringe benefit credits and eCPR certified payroll, reconciled to your books rather than kept in a parallel system. Worker classification questions show up here more than anywhere else - our EDD payroll tax audit page is the companion read.

Residential builders and developers

Home construction contracts have their own exception under IRC 460(e)(6), which changes the method question entirely. Job-cost bookkeeping, draw schedules and lot-level cost tracking run through our bookkeeping practice and feed the same year-end return.

Questions contractors ask us

Construction accounting and California compliance, answered

Talk to a construction CPA

Percentage-of-completion - profit reported as the work progresses - unless you fit an exception. Any contract you do not start and finish in the same tax year is a long-term contract, and IRC section 460 defaults it to that method. Completed contract, where profit is reported only when the job closes, and cash become available only through the small-contractor exception in section 460(e)(1)(B) or the home construction exception in section 460(e)(6).

Yes, for bona fide construction subcontracting. Labor Code section 2781 takes those relationships out of the ABC test and judges them under the older, multi-factor Borello test instead. The exemption is conditional: a written subcontract, a CSLB-licensed sub working inside its license scope, a separate business location and the remaining statutory conditions all have to be documented. The separate construction-trucking carve-out in section 2781(h) applied only to work performed before January 1, 2025.

Most often, a former 1099 worker files for unemployment. The EDD finds no wage record, opens an inquiry, and that single claim can put your entire subcontractor list under review - with employer payroll taxes, penalties and interest across the audit period at stake. Filing a DE 542, the form that reports a new independent contractor to the EDD, does not settle the question; the classification test still applies to every sub on the list.

Ask your surety agent and get the answer in writing - there is no published rule, only underwriting convention. Service levels scale with bonding capacity: a compilation (statements assembled, no testing) supports smaller programs, a review (limited testing) is what most mid-size contractors are asked for, and full audits appear as capacity grows. Any specific revenue threshold you find online is one carrier's practice, not a standard.

Usually yes for payroll, and sometimes for income tax. Wages are taxed where the work is performed, so withholding and registration duties follow the crew across the state line. California treats you as doing business here based on your activity or on sales, property and payroll levels the FTB adjusts every year - and those thresholds are not a safe harbor. We prepare business and personal returns for all 50 states, so out-of-state filings happen alongside the California one.

What to have ready

What we need to produce a WIP-supported financial statement

Job and contract records

What builds the WIP schedule

Open job list with contract value for every active job
Job cost report showing costs to date on each job, tied to your books
Current cost-to-finish estimate for each job, from the project manager
Billings to date and retention withheld, job by job
Change order log - approved, pending and disputed listed separately
Issued purchase orders and signed subcontracts (your committed costs)
Full cost report from one completed job, as a benchmark for estimate accuracy
Your subcontract template and one signed subcontract
Certified payroll filings and DIR registration number, if you bid public works

Financial and compliance records

What makes the statements bond-ready

Last two filed federal and state business returns
Most recent balance sheet and income statement
Bank and credit card statements through the last closed month
Accounts receivable aging with retention receivable on its own line
Your surety agent's name and your current single and aggregate bonding limits
CSLB license number and classifications
Equipment list with purchase dates, cost and loan terms
Owner pay detail and any related-party leases or loans
Any open notice from the IRS, FTB, EDD or CDTFA

Next step

Signing 2026 contracts, or waiting on a bonding decision?

If you are signing contracts under the new retention rules, waiting on a surety decision, or holding a notice from the EDD or CDTFA, the useful next step is a 20-minute call with AJ Singh, CPA and Enrolled Agent - federally authorized to represent taxpayers before the IRS. Bring your current WIP schedule and your last filed return. You will hear back the same business day, and we will tell you plainly whether we are the right firm for the problem. Call 909-217-7855 or use the form.

Request a 20-minute consultation

Tell us your trade, your entity type, and what your surety, lender or agency is asking for. No charge for the first call.