Home Builders and the Completed Contract Method of Accounting

For tax purposes, large construction contractors are generally required to utilize the percentage-of-completion method of accounting to report taxable income from long-term contracts. The percentage-of-completion method of accounting recognizes profit on jobs as costs are incurred. However, IRC Section 460(e) provides for two exceptions that allow taxpayers to potentially defer taxable income under an exempt contract method.

The first exception applies to contracts estimated to be completed within two years by a taxpayer whose average annual gross receipts for the three taxable years preceding the year the contract is entered into is less than $10M. The second exception applies to any home construction contract, without regard to the taxpayer’s average gross receipts. 

By utilizing the home construction contract exception, large homebuilders have the potential to realize significant income deferral under one of the exempt-contract methods of accounting. One of the exempt-contract methods of accounting is the completed contract method, which allows taxpayers to defer taxable income generated from the job until the contract is completed. As a result, any taxpayer who enters into home construction contracts should consider whether it would be advantageous for his or her business to compute taxable income for these contracts under the completed contract method.

Please contact us to discuss the potential application of the completed contract method to your business and visit our Construction services page to learn more about the services that the Schneider Downs Tax Advisors offer.


You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
CARES Act, Tax BY Austin Nace
Disappointing News for Employers: Employee Retention Credit Ends Before Fourth Quarter of 2021
Build Back Better Tax Legislation Update – International Tax Changes
Welcome News for the Trucking Industry - Clarification of 100% Meals and Entertainment Deduction for Per Diems
Higher Estate Tax Exemption Amount for 2022
Michael Jackson vs. Kenny Pickett
Tax Reform 2021 - Build Back Better: Proposed Changes to Section 199A Qualified Business Income Deduction
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.