Construction Tax Accounting Methods & Choices: An Overview

Accounting for income from construction contracts is not always easy or straightforward. Some methods can accelerate income, while others allow a contractor to legally defer income. As we review the options, consider three overriding issues: Is the construction contractor considered “small” for tax purposes? Is the contract short-term (i.e., started and completed during the tax year) or long-term? Does the nature of the work performed fall within a specialized category (e.g., residential or home construction contracts (HCCs))? If a contractor’s annual gross receipts average less than $10 million (based on the prior three years of receipts),1 then it is considered a small contractor. While a small contractor can choose which method it uses for regular tax purposes, it may want to use the completed-contract method (CCM) or the cash method to better match profit reporting to cash flow. Completed-Contract Method Under the CCM, profits from long-term contracts are reported when the contract is completed. In a typical scenario, if a… read more →