Construction Company Saves $320K by Switching to Completed Contract Method

The Problem

This client operated a general construction company through an S-Corp, handling residential and light commercial projects averaging $200K-$800K per contract. The company used the percentage-of-completion method (PCM) for revenue recognition under IRC §460, recognizing revenue as work progressed on each job. With 12-15 active jobs at any given time, the company was recognizing revenue — and paying tax — on partially completed projects where cash had not yet been collected and final profitability was uncertain.

The prior CPA had implemented PCM because "it's required for construction companies," which is incorrect. Under IRC §460(e)(1)(B), the small construction contract exception exempts contracts expected to be completed within two years from a contractor whose average annual gross receipts for the prior three years do not exceed $29M (adjusted for inflation). This client's $5M revenue and 6-14 month average project timeline clearly qualified for the exception. The completed contract method (CCM) would allow the company to defer revenue recognition until projects were completed, creating significant tax deferral on work-in-progress.

AE Tax Strategy

1. Accounting Method Change to CCM Under IRC §460(e)(1)(B)

We filed Form 3115 to change from the percentage-of-completion method to the completed contract method under the small construction contract exception. At the time of filing, the company had $1.4M in work-in-progress revenue recognized under PCM that had not yet been billed or collected. Under CCM, this revenue would not be recognized until the contracts were completed. The favorable Section 481(a) adjustment of $920,000 (representing the cumulative difference between PCM and CCM revenue recognition) was spread over four years, producing $230,000 in annual tax deferral.

2. Job Costing and Contract Timing Optimization

We implemented a job costing system that tracked each contract's estimated completion date and structured contract timing to maximize the CCM deferral benefit. Contracts expected to span the year-end were structured to complete in January rather than December when possible, deferring an additional $380,000 in revenue recognition from Year 1 to Year 2. At the owner's 35% marginal federal rate, the combined method change and timing optimization deferred approximately $320,000 in taxes in the first year.

3. Equipment Section 179 and Bonus Depreciation Stacking Under IRC §179

Concurrent with the method change, we identified $420,000 in construction equipment purchases eligible for Section 179 and bonus depreciation. Excavators, skid steers, trailers, and specialized tools were deducted in full in Year 1 rather than depreciated over 5-7 years. This produced an additional $147,000 in first-year deductions. Combined with the method change deferral, the company's effective tax rate dropped from 31% to 8% in the transition year.

Before & After Comparison

Tax Category	Before	After	Savings
Revenue Deferral (Method Change)	$920,000	$0	$920,000
Year 1 Tax Deferral	$0	$320,000	$320,000
Equipment Depreciation (Section 179)	$0	$420,000	$420,000
Total	$920,000	$0	$320,000 (tax deferral)

Key Takeaways

• The small construction contract exception under IRC §460(e)(1)(B) allows contractors with under $29M in average gross receipts and contracts completed within two years to use the completed contract method.
• The completed contract method defers all revenue and expenses until the project is accepted by the customer, creating significant tax deferral on work-in-progress.
• Form 3115 for accounting method changes is filed under the automatic consent procedures — no IRS approval required when properly documented.
• Combining CCM with strategic contract timing and Section 179 equipment deductions can reduce a construction company's effective tax rate dramatically in the transition year.