We bought materials in December for a job starting next year. Do they reduce this year's contract income?
Buying materials is not the same as immediately deducting them or earning an equivalent percentage of contract revenue.
By AE Tax Advisors Team · Updated October 28, 2026
Buying materials is not the same as immediately deducting them or earning an equivalent percentage of contract revenue. A percentage-of-completion contractor must identify properly allocable contract costs and apply the applicable allocation rules. A contractor using an exempt method must separately evaluate materials, inventories and its established tax method.
A specific business-owner situation
A builder prepays for steel in December while fabrication and installation begin in March. The steel remains at the supplier, and the builder wants the entire payment to reduce current taxable profit.
Illustrative example, not a client result.
What to establish before filing
- Confirm title and delivery terms.
- Tie the materials to the specific contract.
- Apply the established cost-allocation and recognition method.
Which fact changes the answer?
A payment securing future supply differs from owned materials properly allocable to an existing contract. Whether the taxpayer has acquired the property changes the starting analysis.
A mistake to avoid
A December bank withdrawal does not settle the tax treatment of materials.
Records that support the decision
- Purchase order and storage agreement.
- Supplier invoice and payment evidence.
- Job-cost ledger.
The decision to document
Reconcile cash paid to materials acquired and tax costs recognized, with no duplicate deduction when used.
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Related questions
- Our estimated construction costs increased sharply. Do we revise prior completion percentages?
- We paid to replace a failed subcontractor. How do those costs enter the unfinished contract calculation?
Sources and editorial context
- Section 460: long-term contracts
- Treasury regulation 1.460-1: contract classification and completion
- Treasury regulation 1.460-5: contract costs
- Treasury regulation 1.460-4: contract revenue and estimates
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.