How the New Tax Law Affects the Percentage of Completion Method for Contracts

The passage of the One Big Beautiful Bill (OBBB) on July 4, 2025, introduces significant reforms to business tax law in the United States. Among its pivotal changes are adjustments to the long-established requirement for using the percentage of completion method (PCM) for certain contracts, particularly affecting construction and real estate businesses. 

Let’s break down what’s changed, what it means for your business and the options now available to construction and real estate business owners.

What Changed Under OBBB? 

Expansion of Exemptions From the Percentage of Completion Method 

Historically, under U.S. tax law, businesses performing long-term contracts — mainly in construction and real estate — had to recognize income using the PCM. Revenue and related expenses are reported as work progresses, rather than when the contract is complete. The primary exception was for small contractors or for certain home construction contracts.

With the OBBB, the exception to the PCM is expanded, but this change applies only to contracts entered into on or after July 4, 2025: 

• Residential construction contracts: The new law extends the exception from the PCM requirement beyond just "home construction contracts" (previously limited to buildings with four or fewer dwelling units) to include broader "residential construction contracts" — which cover buildings with more than four units. 
  • This shifts a significant category of contracts out of the PCM regime

• Completed contract method access: Businesses that qualify may now opt to use the completed contract method instead, allowing them to defer income recognition until the contract is finished 

Why Does This Matter? 

The method used to recognize income has real financial impacts:

• With PCM, revenue is recognized as work is completed, generally accelerating tax liability
• With the completed contract method, revenue and expense recognition are delayed until the entire project concludes, possibly deferring tax liability and improving short-term cash flow

For many contractors, developers and construction firms, the ability to choose their method can create substantial planning benefits.

Who Qualifies for the New Exception? 

Residential construction contracts now include contracts for projects where at least 80% of costs are attributable to constructing, reconstructing or rehabilitating "dwelling units" (apartments, condos, etc.) through buildings containing more than four units. Individual dwellings in larger complexes now fall under the exception, provided they are not used predominantly for transient purposes (e.g., are not hotels, motels, etc.).

The following is a practical example. Remember, the new rules apply only to contracts entered into on or after July 4, 2025.

What Are Your Options as a Business Owner? 

With the OBBB changes, business owners in affected industries should consider the following steps:

1. Review contract types: Identify which of your contracts now qualify as "residential construction contracts" under the new, broader definition
2. Evaluate your accounting method:
   1. Consider switching to completed contract method: If eligible, businesses can defer income recognition until jobs are complete, improving cash flow and potentially reducing current tax liability
   2. Remain with PCM: Some businesses may opt to stick with PCM for consistency, especially if financial reporting or debt covenants require it
3. Consider tax planning opportunities: The ability to defer revenue and related taxes can support business growth and reinvestment —assess the impact with your CPA or tax advisor to make data-driven decisions about method selection and timing of contract starts/completion
4. Implement changes consistently: If you switch methods, ensure documentation and processes are updated.
   1. The IRS requires consistent application and proper substantiation for accounting methods in use
5. Monitor additional OBBB provisions: Bonus depreciation, expanded Section 179 limits and other OBBB changes may interact with your contract planning and tax position

Key Takeaways 

• The OBBB expands exemptions to the percentage of completion rule for many residential projects, effective only for contracts entered into on or after July 4, 2025
• Eligible business owners now have the option to defer tax using the completed contract method, which may significantly impact cash flow and taxable income
• Assess your current contracts, method of accounting and future tax strategy with professional guidance to make the most of new planning opportunities

Need Help? 

There's no better time than now to learn exactly how the new legislation affects you and your tax situation. Contact us online or call 800.899.4623.

Read more in our article, New Tax Law Brings Big Wins for Business Owners.