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Completed Contract Method vs. Cash Basis: What Changed for Contractors
Completed Contract Method vs. Cash Basis: What Changed for Contractors
Completed Contract Method vs. Cash Basis: What Changed for Contractors
Most contractors are on cash basis without ever having chosen it. It is simple, the bookkeeper set it up that way years ago, and nobody revisited it. On jobs that span a year-end, that default can cost real money, and a 2025 law change just widened the group of contractors who have a better option.
The difference in one paragraph
Cash basis recognizes income when the money arrives and expenses when they are paid. The completed contract method (CCM) holds both the revenue and the job costs on the balance sheet until the contract is substantially complete, then recognizes everything in that year. On a job that starts in October and finishes in March, cash basis can tax you on progress billings collected in year one while the costs that offset them land in year two. CCM keeps them together.
Percentage of completion (PCM) is the third option, and under Section 460 it is the default requirement for long-term contracts. The planning question is whether you fall into one of the exceptions that lets you out of PCM.
The two exits from percentage of completion
Section 460(e) provides two of them, and they are independent. You need to qualify under only one.
- The residential exemption. Historically this covered home construction contracts, meaning buildings with four or fewer dwelling units. There is no size or revenue limit attached to it.
- The small construction contract exemption. This one has two conditions: the contract is expected to be completed within a set number of years, and you meet the Section 448(c) average gross receipts test.
What the 2025 law changed
The One Big Beautiful Bill Act moved both tests in the contractor’s favor.
| Test | Before OBBBA | Contracts entered in tax years beginning after July 4, 2025 |
|---|---|---|
| Residential exemption | Home construction contracts, four or fewer dwelling units | Residential construction contracts, no unit cap |
| Small contract duration test | Expected completion within 2 years | Expected completion within 3 years |
| Gross receipts test | $31 million average for 2025 | $32 million average for 2026 |
The residential change is the larger one. Replacing “home construction contract” with “residential construction contract” removes the four-unit ceiling, which means apartment buildings, condominium projects and larger multifamily work can now qualify for the exemption. Before, a builder doing a 40-unit apartment complex was locked into PCM regardless of size.
The duration change matters more than it looks. Moving the small-contract test from two years to three brings in the long-cycle commercial and infrastructure work that used to fall just outside it.
Both changes apply on a cut-off basis to contracts entered into in tax years beginning after July 4, 2025. They do not reach back to contracts already signed, and there is no catch-up adjustment on the old ones. Practically, that means the contracts you sign going forward are the ones to plan around.
What deferral is actually worth
Take a $3 million project carrying $600,000 of profit that crosses a year-end. Deferring recognition of that profit by one year at a combined 30% rate keeps roughly $180,000 in the business for another twelve months. That is bonding capacity, payroll float and working capital you would otherwise have wired to the IRS.
It is a deferral, not forgiveness. The tax is still owed when the job closes. For a contractor with a steady pipeline, though, a rolling deferral behaves much like permanent working capital, because there is always another job in progress behind the one closing.
The parts nobody mentions
- Lookback and UNICAP still exist. Getting out of PCM for regular tax does not automatically exempt you from the lookback method or from Section 263A cost capitalization. Check both before assuming the change is free.
- The AMT question is open. The long-term contract adjustment for alternative minimum tax has historically excepted home construction contracts. Whether the broadened residential definition carries into that exception is something practitioners are still watching. Ask rather than assume.
- Your surety will want GAAP anyway. Tax method and financial statement method are separate. Bonded contractors generally keep percentage of completion on the financials for the surety and run CCM on the tax return.
- Changing method has procedure attached. A method change normally runs through Form 3115. Because the OBBBA change applies on a cut-off basis, new contracts are handled differently from a general method change; confirm which path applies to you.
Signing new residential or multi-year work? The exemption test now turns on when the contract was entered into, so the timing of a signature can decide the method. We can model the deferral against your actual job schedule before you commit.
The short version
If you sign contracts that cross a year-end, cash basis is probably not your best answer. The residential exemption no longer caps out at four units, the small-contract test now reaches three years, and the gross receipts threshold sits at $32 million for tax years beginning in 2026. Both changes apply only to contracts entered into in tax years beginning after July 4, 2025, which makes this a forward-looking decision worth making before the next contract is signed rather than at tax time.
General information, not tax advice for your situation. Section 460 outcomes depend on contract terms, entity structure and gross receipts history. Accounting Solutions LLP works with construction contractors nationwide.
Disclaimer: This content is provided for educational purposes only and is not legal, tax, accounting, or financial advice. Every situation is unique, so consult your own attorney, CPA, or financial advisor before making decisions based on this information.
