On October 30, 2024, the IRS released a Large Business and International (LB&I) Concept Unit regarding land developers’ and subcontractors’ proper method of accounting related to long-term contracts. This directive applies to large contractors and developers with average annual gross receipts of more than $30 million in 2024 ($31 million for 2025).
The IRS continues to clarify its position regarding the use of the completed contract method for developers and subcontractors. In the release, it noted that a long-term home construction contract is needed in addition to a contract for any common area improvements. Section 460(e)(5)(A) defines a home construction contract as one in which 80% or more of the estimated costs are expected to be attributable to dwelling units and improvements to real property directly related to the dwelling units and on the site of those units. The IRS cited Howard Hughes Company, LLC v. C.I.R., where the land developer lost on appeal and was not allowed to use the completed contract method since it was not constructing homes.
In Technical Advice Memorandum 201650014 issued after the case, the IRS further clarified that work done on a lot-by-lot basis where the home’s foundation will be located would be a home construction contract in which a completed contract would be an acceptable method. The recent IRS posting indicates it will continue to focus on the proper method of accounting for long construction contracts, especially where home construction is used by larger developers and subcontractors.
Taxpayers who are developers and subcontractors using the completed contract method may want to review their fact patterns and how this clarification may impact their accounting method. If you need to change your accounting method, you may need to file Form 3115 using the procedures in Revenue Procedure 2015-13.
Forvis Mazars will have more details and guidance on this matter. If you have any questions or need assistance in the meantime, please reach out to a professional at Forvis Mazars.