News & Press

As Published in CIC Construction News – Feb ’26

By Phillip Ross, CPA, CGMA, Anchin
Partner & Co-Leader, Construction Industry Group

The One Big Beautiful Bill Act (OBBBA) has provided a valuable tax deferral opportunity for contractors doing residential projects by significantly increasing the relevancy and value of the completed contract method of accounting for reporting taxable income. Generally, businesses above a certain threshold engaged in construction are required to report taxable income using the percentage of completion method, meaning that income is recognized as the project progresses towards completion. This accounting method allows for only limited flexibility to defer income.

Prior to the OBBBA, residential contractors above a certain threshold were exempt from percentage of completion only for home construction contracts which are defined as a single home or small building comprising 4 or less units. For larger contracts, they were able to report 70% of contract income using the percentage of completion method and 30% using the completed contract method (the “70/30” method).  Under the OBBBA residential contractors are now able to report 100% of their income on all residential projects, using the completed contract method or the cash method, assuming general requirements for cash method are met. Additionally, they will not be required to use the percentage of completion method for Alternative Minimum Tax (AMT) computation purposes, which had previously significantly reduced the benefits of the tax deferral. Under the completed contract method, taxable income is not recognized until the contract is substantially complete (substantial completion generally defined as greater than ninety-five percent complete). This method allows residential contractors to improve their cash flow and reinvest the tax savings to expand their business. This new provision will benefit contractors building large multifamily units, long-term care facilities, and student housing projects.

To illustrate the tax effect, let’s assume Company ABC, a contractor enters into a $20 million residential construction contract (for more than 4 units) with a gross profit margin of 15%. At the end of Year 1, the contract is 50% complete. Under the percentage of completion 70/30 method, ABC would report taxable income of $1.05 million ($20 million x 15% x 50%x70%). If they elect to use completed contract method, the taxable income can be deferred to the year the contract is completed. Assuming an effective tax rate (federal and state) of 40%, that represents $420,000 tax savings in Year 1 (1.05 million x 70% x 40%). Additionally, under the 70/30 method, ABC would have an AMT add-back of $450,000 ($20 million x 15% x 50% x 30%). OBBBA eliminates this AMT add-back.  If the contract is completed in Year 2, ABC would be liable for the tax on the entire contract in Year 2. As ABC begins new residential projects each year, this tax can be mitigated by the deferral on jobs started in Year 2 and not completed until subsequent years. ABC Company will need to monitor the status of its various contracts to track its deferral and maximize cash flow.

The new tax law applies to contracts entered in tax years starting after July 4, 2025. For calendar year taxpayers, the new provision will most likely take effect for the 2026 tax year. The IRS and Treasury are expected to issue guidance on the required procedures to convert to completed contract method which would involve the making certain tax elections, disclosures and the filing of additional tax forms. A change in accounting method involves various considerations which should be discussed with a tax advisor. Meanwhile, residential contractors can plan for this change by analyzing their contracts for eligibility under the new provisions.

Work with your CPA for more information on how a change in accounting method can benefit your construction firm.