Background
House Resolution 1, colloquially referred to as the One Big Beautiful Bill Act (OBBBA), increases the options available to taxpayers in the construction industry for recognizing costs under long-term contracts for tax purposes. At a high level, the act exempts taxpayers constructing residential real property from requirements to utilize the percentage of completion method, and it allows them to wield another method to recognize revenue and costs for tax purposes. In this article, we will discuss these changes to construction tax methods and delve into their impact on taxpayers.
Percentage of Completion and Residential Property
Before the enactment of the OBBBA, Section 460 of the Internal Revenue Code (IRC) generally mandated that all long-term contracts utilize the percentage of completion method to recognize revenue and costs during the life of the contract. The law permitted an exception to this rule for taxpayers with:
- home construction contracts, or
- contracts with a life of two years or less, and
- average annual gross receipts under $31 million (adjusted for inflation for 2025) for the preceding 3 years.
Pursuant to IRC §460, taxpayers only qualify for this home construction exemption if they are building or improving dwellings in buildings with less than four dwelling units. Taxpayers falling under this exemption may utilize another method such as the completed contract method rather than using the percentage of completion method or 70/30 method to recognize revenue and costs.
The OBBBA expands this exemption to apply to residential construction contracts in addition to home construction contracts. Under IRC §460, residential construction contracts consist of construction projects aimed at building units with more than four dwelling units. The act also applies to contracts of three years or less and taxpayers with average annual gross receipts fall under $31 million for the preceding three years. Under the OBBBA, these taxpayers will be allowed to utilize another method to recognize the contract revenue and costs related to these projects. Under the act, the changes will take effect for all contracts entered into in tax years beginning after July 4, 2025.
Forvis Mazars Insight: The One Big Beautiful Bill Act has created an interesting opportunity for contractors in the multi-family development space. Large contractors, for any contract greater than four units, are now exempt from having to use the percentage of completion tax method or the 70/30 method. Essentially these types of contracts can convert to a completed contract method for tax purposes.
This method of tax accounting could be utilized by multi-family contractors to plan for taxable income between years depending on the completion date of jobs. For example, a contractor with a job wrapping up at an overall tax loss position might be able to accelerate the completion of a job with a large income position to close in the same tax year. This timing would allow for the contractor to offset the large profit job with the losses from another job. A lot of factors determine the timing of completing a project from supply and labor issues to permitting snafus, while the new tax law change adds to that list of factors it could create some great planning opportunities for contractors to accelerate or defer the taxable income impact of multi-family residential contracts.
Implications for Alternative Minimum Taxes
Residential contractors exempt from utilizing the percentage of completion method for regular income tax calculations are also exempt from utilizing the percentage of completion method for alternative minimum income tax calculations. IRC §56 requires that these taxpayers run both calculations if electing another method under the exemption to IRC §460. As such, taxpayers operating under the expanded §460 exemption may be subject to less alternative minimum taxes. Taxpayers with average annual gross receipts under $31 million who are not residential contractors are exempt from employing the percentage of completion method for income tax purposes but not for alternative income tax purposes.
How Forvis Mazars Can Help
Our national methods team and construction industry professionals can help you understand your options under the expanded §460 exemption. They can model out which method may be right for your business and its tax needs. Additionally, our team can help you navigate other changes related to recent tax legislative changes. To learn more about other changes related to the recent tax legislation, visit our website and our 2025 Tax Bill Guide. For answer to more in depth questions, please reach out to a team member.