General Contractor and Remodeler Deductions: Subcontractors, Materials, the Job-Cost Ledger, and the Permits That Follow the Job

General contracting is a pass-through trade with a margin, and the return is the job-cost ledger. Subcontractors — the largest line: framers, electricians, plumbers, HVAC, drywall, painters, flooring, tile, cabinetry, roofing — each a genuine independent business with its own license, insurance, and other customers (the subcontractor guide covers the file: a W-9 before the first payment, a 1099-NEC in January for each paid US$2,000 or more for payments made in 2026 (US$600 before) — and a certificate of insurance and workers' compensation on file, because an uninsured sub's injured worker is the general's claim and the general's workers' compensation carrier will charge premium on the sub's payroll at audit if no certificate exists), paid on progress with lien waivers exchanged at each payment (a conditional waiver on payment, an unconditional waiver once the check clears — the discipline that protects the owner from a sub's lien and the general from paying twice); the sub payments are job costs coded to the job, and the general's own crew (a carpenter or two, a laborer — employees on the company's schedule with the company's tools, on payroll with workers' compensation at the carpentry rate) is the labor line. Materials: the general buys some (lumber packages, windows and doors, the items the general wants to control) and the subs supply the rest within their bids — the general's purchases are job costs coded to the job, delivered to the site, with a small shop stock (expensed as consumed with a year-end count where material); supplier rebates and contractor pricing follow the HVAC guide's treatment; and the customer-selected finishes purchased through the general (tile, fixtures, appliances) are pass-throughs with the general's markup — revenue and cost on separate lines. The accounting method — the trade's central tax question: a remodeler whose jobs span a year-end chooses between the cash method (income when received, expenses when paid — permitted for a small contractor under the gross receipts test; the consulting revenue recognition guide), the completed-contract method (income and expenses deferred until the job is complete — available for residential construction contracts (homes and, for contracts entered into from 2026, other residential buildings) and for small contractors on contracts expected to finish within two years, and the method that defers a December job's profit into the year it finishes), and the percentage-of-completion method (income recognized as the job progresses, measured by costs incurred over estimated total costs — required for long-term contracts of larger contractors other than residential construction contracts, and the method lenders and bonding companies want on the financial statements); most small remodelers use the cash method for tax with percentage-of-completion books for management, and a growing contractor changes methods when it crosses the threshold (Form 3115, applied to new contracts on a cut-off basis). Deposits and draws: a customer's deposit at contract and progress draws at milestones are cash-method income when received (the cabinet estimated-tax guide's deposit discipline — deposits are cash the subs and materials will consume, and the job-cost ledger shows the job's profit, not the bank balance); change orders are income when the changed work is billed and paid; retainage held by the customer (5% to 10% on commercial work) is income when released under the cash method — the general's own retainage receivable at year-end is next year's income, and the retainage the general holds on its subs is next year's deduction when paid. Permits and inspections: building permits, the trade permits the subs pull (theirs, usually), plan review fees, impact fees on new construction, and the inspection fees — job costs coded to the job (the electrical deductions guide's rule — never overhead), including the re-inspection fees when a sub's work fails. The trucks and equipment: the general's pickup or van (actual expenses or standard mileage — a general who visits sites all day runs real mileage; the courier deductions guide's comparison), the trailer, the job-site equipment (a skid steer or mini-excavator if owned — section 179; rented per job otherwise — a job cost), the tools (de minimis), the site facilities (portable toilets, dumpsters, temporary fencing — job costs by rental), and the temporary utilities on new construction (job costs). Insurance and bonding: general liability with completed operations (the general's exposure for the whole job, including the subs' work), builder's risk on new construction and major remodels (a per-project policy — a job cost), workers' compensation on the general's own crew, the trucks' commercial policies, the umbrella, and — on public and larger private work — the surety bond (the construction accountant cost guide covers the bonding statements; the bond premium is a job cost). Licensing: the state contractor's license and its continuing education, the local registrations, and the certifications (the lead-safe RRP certification for pre-1978 remodels — the painting guide covers the rule and its application to remodelers, who disturb paint on every kitchen and bath in an older home). Software: estimating and takeoff, project management and scheduling, the customer portal, the job-costing and accounting platform, and the payment processing. The office: a rented office or the home office (the contractor home office guide — the exclusive-use test and the principal-place rule, with the site mileage it unlocks). Warranty and callback work: the general's cost of fixing its own or a sub's defective work under warranty — a cost when incurred (and the sub's responsibility to reimburse, tracked as a receivable against the sub or a deduction from the sub's retainage). Sales tax: the general is the consumer of materials in most states (tax paid at purchase; none charged on the completed job — the construction sales tax guide), with the retailer-rule states, the exempt-entity certificates on public and institutional work, and the customer-selected finishes purchased for resale under a resale certificate where the state treats them as tangible personal property sold to the customer. Entity and self-employment: general contracting is not a specified service trade — the QBI deduction applies at all income levels (the general contractor entity guide). The bookkeeping — the job-cost ledger: every job with its contract price, change orders, deposits and draws received, retainage receivable, sub payments by sub (with lien waivers), materials, permits, equipment rentals, site facilities, the general's own labor, builder's risk, bond premium, and the job's profit to date; the sub file (W-9, certificate, 1099); the method's timing; the fixed asset schedule; insurance by policy; sales tax by state. The errors: subs without certificates (the carrier's audit and the injured worker); permits and site facilities in overhead (the job cost report lies); deposits booked as profit (the bank balance mistaken for margin); retainage booked at billing; and the accounting method never chosen (a contractor drifting between cash and accrual without an election is on an impermissible method).

Key takeaways

• Subcontractors are the largest line and the largest file: W-9 before the first check, 1099-NEC in January, certificates of insurance and workers' compensation before the first day, lien waivers at every payment — the discipline that protects the payment and the premium.
• The accounting method is the trade's tax question: cash for most small remodelers, completed-contract for jobs that span a year-end, percentage-of-completion for the books lenders and sureties want — chosen, elected, and changed on Form 3115.
• Deposits and draws are cash, not profit; retainage is income when released — the job-cost ledger shows the margin, the bank balance shows the cycle.
• Permits, inspections, site facilities, equipment rentals, builder's risk, and bond premiums are job costs coded to the job — never overhead.
• Customer-selected finishes are pass-throughs with revenue and cost on separate lines; the general's own crew is on payroll; the lead-safe certification applies to every pre-1978 remodel.
• Not a specified service trade; the consumer rule governs sales tax in most states, with resale certificates for finishes sold to the customer.

The general contractor's job-cost ledger

Per job: contract price; change orders; deposits and draws; retainage receivable; subs by name (W-9, certificate, lien waivers, 1099); materials; pass-through finishes (revenue and cost); permits and inspections; equipment rentals; site facilities; builder's risk; bond premium; own labor; warranty costs; profit to date. Company: method on the return (cash / completed-contract / percentage-of-completion) and on the books; fixed asset schedule; insurance by policy; sales tax by state. The ledger is the return, and the sub file is the audit defense.

Worked example

A residential remodeler grosses US$3.1 million across 22 kitchen, bath, and addition projects: US$1.9 million of subcontractor payments (14 subs — every one with a W-9, a certificate of insurance and workers' compensation, and lien waivers at each draw; 1099-NECs in January), US$480,000 of materials the general bought, US$210,000 of customer-selected finishes passed through at a 15% markup (revenue and cost on separate lines, bought under a resale certificate where the state taxes them to the customer), US$62,000 of permits, inspections, and impact fees coded to jobs, US$38,000 of dumpsters and site facilities coded to jobs, builder's risk on the three additions as job costs. The general's own crew: two carpenters and a laborer on payroll with workers' compensation at the carpentry rate. Method: cash for tax (well under the gross receipts threshold), percentage-of-completion books for the bank line; at year-end, US$280,000 of deposits and draws received on four unfinished jobs are cash-method income (the ledger shows the jobs' profit to date at 18%), US$45,000 of retainage the customers hold on two completed additions is next year's income, and US$30,000 of retainage the general holds on its subs is next year's deduction. The truck on actual expenses; a mini-excavator rented per job; tools under de minimis; the lead-safe firm certification renewed and the certified renovator on staff (eight of the 22 homes were pre-1978). Sales tax: consumer rule on the general's materials. Net profit lands in the low-to-mid six figures — an S corporation with the owner's salary from a construction project manager's market wage plus management (the entity guide), the QBI deduction in full. The remodeler across town, whose subs had no certificates: the workers' compensation audit added US$620,000 of uncertified sub payments to insured payroll, and a tile setter's injury on a job with no certificate became the general's claim.

Official sources

The Form 1099-NEC instructions state: “Section 6071(c) requires you to file Form 1099-NEC on or before January 31, using either paper or electronic filing procedures.” — Internal Revenue Service, Instructions for Forms 1099-MISC and 1099-NEC, https://www.irs.gov/instructions/i1099mec

Publication 538 states: “Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them.” — Internal Revenue Service, Publication 538, Accounting Periods and Methods, https://www.irs.gov/publications/p538

Practitioner note

A general contractor's return is a job-cost ledger with a sub file attached, and the sub file is the audit defense: a W-9 before the first check, a certificate before the first day, and lien waivers at every draw are what keep the carrier's audit from adding uncertified subs to insured payroll and the injured sub's worker from becoming the general's claim. Our remodeler files choose the accounting method deliberately — cash for tax, percentage-of-completion for the bank — book deposits as the cash they are, and put permits and site facilities in the job where the margin is measured, not in overhead where it disappears.

See also: For related guidance, see general contractor estimated taxes: deposits, draws, retainage, and the job that spans December; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles general contractor and remodeler returns and bookkeeping — subcontractor compliance files with 1099s, certificates, and lien waivers, accounting method selection and Form 3115 changes, job-cost ledgers with deposit, retainage, and change-order timing, pass-through finish accounting, and bonding statement preparation. See pricing or book a call.