Contract accounting methods
Long-term contracts follow Section 460, with percentage-of-completion for large contractors and exceptions for small and residential contracts.
Industry tax guide
Construction tax and accounting
Tax planning that follows your contracts, your equipment and your jobs.
Contractors live on thin margins, progress billings and retainage, with cash moving out to crews and subcontractors before customers pay. Reported profit often differs from cash for long stretches of a project.
Tax planning starts with the accounting method for each contract type, then turns to equipment, design-build innovation and the cash taxes the method creates.
Compared with a general business
What makes taxes different for construction
Lookback interest
Contractors using percentage-of-completion must recompute income when a contract ends and pay or receive interest on the difference, filed on Form 8697.
Prevailing wage and certified payroll
Public projects require certified payroll and prevailing wage records that affect payroll tax reporting and job costs.
Use tax on materials
Contractors are often treated as the final consumer of materials and owe sales or use tax on them, depending on the state and contract type.
The rules in detail
Tax rules for construction
Accounting methods for long-term contracts
Large contractors generally report contract income under the percentage-of-completion method. Smaller contractors that meet the gross receipts test can use the completed-contract or other methods for jobs expected to finish within two years, which can defer tax on work in progress.
Residential contracts are exempt
Starting with contracts entered into in tax years beginning after July 4, 2025, the exemption from percentage-of-completion covers all residential construction contracts, including multifamily buildings, not only homes of four units or fewer.
Equipment and design-build innovation
Machinery and equipment qualify for 100% bonus depreciation when acquired after January 19, 2025. Design-build firms that develop new methods, prefabrication or building systems may also qualify for the research credit.
Planning moves
Ways to save tax in construction
Use the small contractor exceptions
Contractors under the gross receipts test can use completed-contract or other methods on short jobs.
Apply the residential contract exemption
Since 2025 all residential construction contracts, including multifamily, are exempt from percentage-of-completion.
Write off equipment the year you buy it
Section 179 or 100% bonus depreciation on machinery and trucks.
Claim the research credit on design-build work
New methods, prefabrication and building systems developed at your risk can qualify.
Manage retainage and billing timing
Retainage receivable is often not taxable until due, depending on the method used.
Keep crews classified correctly
Correct employee and subcontractor classification avoids payroll tax assessments and penalties.
Working with OICPA
How we help
Pick the right method for each contract
We review your contract mix and gross receipts and move eligible jobs to the method that matches cash.
Business Tax AdvisoryWrite off equipment in the year you buy it
Section 179 or bonus depreciation on excavators, trucks and tools, timed to the year it saves most.
Business Tax PlanningResearch credit for design-build work
Prefabrication, building systems and new construction methods reviewed for qualified research.
R&D Tax CreditJob costing that matches the return
WIP schedules, over/under billings and job cost reports that feed the tax method directly.
Management Reporting & KPI DashboardsBookkeeping and reporting
The accounting behind the tax work
Reconcile work in progress with billing and cash forecasts so a growing backlog does not conceal a funding gap.
The operating challenge
Progress billings, retainage, change orders, and subcontractor payments can pull cash flow in a different direction from reported revenue.
The records that matter
Job cost reports, signed contracts, change orders, retainage schedules, and subcontractor documentation give the review a practical starting point. We identify missing information before recommending changes.
What you can expect
- A prioritized review of the industry-specific accounting issues above
- A tailored reporting and document checklist based on your operating records
- An agreed action plan connecting financial reporting, tax deadlines, and specialist coordination
Frequently asked questions
Do we have to use percentage-of-completion?
Not if you meet the gross receipts test and expect the contract to finish within two years, or if the contract is residential. Larger commercial contracts generally do.
Does the new residential rule cover apartment buildings?
Yes. For contracts entered into in tax years beginning after July 4, 2025, the exemption covers residential construction contracts of any size, including multifamily.
Can a contractor really claim the R&D credit?
Yes, when the firm resolves technical uncertainty at its own risk, such as developing a new structural approach, prefabrication process or building system. Routine construction work does not qualify.
Related articles
References
- 26 U.S. Code § 460: Special rules for long-term contractsLegal Information Institute, Cornell Law School
- 26 U.S. Code § 168: Accelerated cost recovery systemLegal Information Institute, Cornell Law School
- 26 U.S. Code § 41: Credit for increasing research activitiesLegal Information Institute, Cornell Law School
- Publication 946 (2025), How To Depreciate PropertyInternal Revenue Service
Rules reflect federal tax law as of November 2026.