Among the many opportunities for small businesses created by tax reform is the expansion and simplification of rules for businesses with less than $25 million in average annual gross receipts. For construction companies, this change in accounting method creates an opportunity to defer income on contracts they likely would have recognized in the past. 

Deciphering the implications of this method change is complex. Here’s what construction companies need to know as they assess their method of accounting.

What Changed
Prior to tax reform, construction companies with average annual gross receipts over $10 million generally had to use the percentage-of-completion method to recognize revenue on long-term contracts. Additionally, these contractors weren’t able to automatically switch to the cash method. Doing so required an application to change their accounting method under advance consent procedures, making it subject to IRS review and incurring significant user fees. With tax reform, the revenue threshold has now increased to $25 million, and there are some potential method changes to consider. 

Overall Accounting Method
Contractors under the new threshold can switch their overall method from the accrual method to the cash method, which could provide an opportunity to defer revenue, especially if receivables are greater than payables. The benefit of this is the potential to take a “catch-up adjustment” – normally a negative adjustment to income – in one year.