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:

1. Is the construction contractor considered “small” for tax purposes?
2. Is the contract short-term (i.e., started and completed during the tax year) or long-term?
3. 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 contractor starts a job in Year 1 and completes the contract in Year 2, then zero profit is reported in Year 1 and 100% is reported in Year 2. For many contractors, profit is typically received at the end of the job when the final retainage payment is received.