For construction contractors, taxpayers are generally required to use the percentage-of-completion method (PCM) of accounting for long-term contracts for tax reporting purposes. However, if a contractor’s average annual gross receipts are below a statutory threshold, then other tax reporting methods are permissible. 

This article examines the new threshold as permissible by the Tax Cuts and Jobs Act, which allows contractors to potentially transition to tax reporting methods, which may be more favorable, as well as the mechanics to achieve these changes.

The New Small Contractor Exemption

The requirement for using the PCM generally does not apply to a construction contract entered into by a taxpayer that estimates such contract will be completed within the two-year period beginning on the contract commencement date, and also meets the gross receipts test of IRC §448(c) for the taxable year in which such contract is entered.

The Tax Cuts and Jobs Act (TCJA), signed on December 22, 2017, included one of the most significant changes affecting contractors in decades by increasing the threshold for defining small contractors. Effective January 1, 2018, the small contractor exemption increased from $10 million to $25 million.