The One Big Beautiful Bill Act (OBBBA) may have passed over a year ago, but some changes are just starting to become real for many construction companies.
One provision of the legislation expands an existing exception to the percentage-of-completion method (PCM) for certain long-term construction contracts. While the change involves some additional analysis and documentation, it could have a significant impact on the timing of taxable income and cash flow for eligible contractors.
For years, many contractors performing long-term projects have been required to recognize income under the percentage-of-completion method, which generally accelerates taxable income as work progresses.
The OBBBA expands an exception that was previously limited to certain home construction contracts, and now applies more broadly to residential construction contracts. Pre-OBBBA rules primarily applied to homes or small residential buildings and required that 80% or more of the estimated total contract costs be attributable to dwelling units in buildings with 4 or fewer units. These kinds of contracts were exempt from the mandatory PCM method for tax and were allowed to use the completed contract method instead. With the OBBBA changes, the definition has been expanded to “residential” construction contracts, including home construction and larger residential projects. It uses the same 80% rule for contract costs, but no longer requires the “4 or fewer units” specification. As a result, some contractors may have greater flexibility in how they account for qualifying projects and when income is recognized for tax purposes, with the potential to defer 100% of the revenue from these projects until they are completed.
For eligible contractors, the expanded exception may create opportunities to defer taxable income and better align tax reporting with project completion and cash collections. Depending on the size and timing of your projects, this could provide meaningful cash flow benefits.
Just as importantly, contractors that previously didn't qualify for an exception may now want to revisit their accounting methods and project classifications to determine whether additional planning opportunities exist.
Implementing this new method will almost certainly require more detailed tax cash flow planning as well, since in years when project completions outpace new project starts, taxable income could spike even though book income may not follow the same pattern.
The change generally applies to contracts entered into during tax years beginning after July 4, 2025. For most calendar-year taxpayers, this means the new rules will apply to qualifying contracts entered into during 2026 and future years.
Although additional guidance may be issued, now is a good time to:
The construction industry received several taxpayer-friendly provisions under OBBBA, and the expansion of the residential construction contract exception may be one of the most impactful for many contractors. While not every business will benefit, contractors with qualifying residential projects should take a fresh look at their accounting methods and tax planning strategies.
If you'd like to discuss how these changes may affect your business, please reach out to our team.