How Construction Accounting Principles Save You Taxes
How do specialized construction accounting principles save you taxes under the new law?
Construction accounting principles save you taxes by utilizing specific methods of revenue recognition, such as the Completed Contract Method (CCM) and the Percentage of Completion Method (PCM), to defer income recognition and align tax liability with actual cash flow. Specifically, the One Big Beautiful Bill Act (OBBBA) signed in July 2025 significantly expands these tax-saving opportunities. Furthermore, by allowing more residential projects to use CCM instead of PCM, the law permits contractors to postpone reporting taxable profit until a project is substantially finished, providing a critical cash-flow advantage.
🏗️ The Power of Revenue Recognition Methods
The core of tax savings in construction lies in Internal Revenue Code (IRC) Section 460. Therefore, choosing the right accounting method is your most potent financial tool.
1. Expanded Access to the Completed Contract Method (CCM)
Before the OBBBA, only “small” contractors or those building single-family homes could easily use CCM. However, the new law fundamentally changes the landscape.
- Residential Exception Expansion: The OBBBA expands the “home construction” exception to include all residential construction contracts. In other words, projects like apartment complexes, student housing, and senior living facilities now qualify for CCM regardless of the builder’s size.
- Tax Deferral Advantage: Under CCM, you do not report income or expenses until the contract is complete. Consequently, you avoid paying taxes on “paper profit” while your cash is still tied up in materials and labor.
- Duration Limit: Crucially, the Act extends the allowable project duration for certain exemptions from two years to three years. Thus, longer projects can now benefit from these deferral strategies.
2. Strategic Use of the Percentage of Completion Method (PCM)
For large commercial or government projects where PCM is still required, specific best practices for construction accounting can still lower your immediate tax bill.
- The 10% Elective Deferral: Contractors can elect to defer the recognition of income on a project until it is more than 10% complete. Similarly, this prevents paying taxes on the very early, often low-margin phases of a job.
- Excluding Retainage: Moreover, specialized CPA services help you exclude retainage (money held back until the end of the job) from your current year’s taxable income calculation. As a result, you only pay taxes on the money you have actually been cleared to receive.
💰 New Incentives Under the One Big Beautiful Bill Act
The OBBBA introduces several “accelerators” that pair with construction accounting principles to drive down your tax basis and liability.
3. Permanent 100% Bonus Depreciation
Capital investment is a cornerstone of construction. Previously, bonus depreciation was scheduled to phase out.
- The Change: The One Big Beautiful Bill Act makes 100% bonus depreciation permanent for qualified property acquired after January 19, 2025.
- Instant Write-offs: Consequently, you can immediately deduct the full cost of heavy machinery, trucks, and even specialized software in the year of purchase. Therefore, a $500,000 crane purchase becomes a $500,000 tax deduction on day one.
4. Qualified Production Property (QPP) Deduction
The Act introduces a brand-new 100% deduction for Qualified Production Property. Specifically, this targets the construction of industrial facilities.
- Eligible Projects: This applies to new nonresidential buildings used for manufacturing, production, or refining.
- Construction Window: To qualify, construction must begin between January 19, 2025, and December 31, 2028.
- Tax Benefit: Notably, this allows the owner—and often the design-build contractor—to deduct the full cost of the facility instead of depreciating it over 39 years.
📝 Best Practices for Construction Accounting
Managing your books correctly is the only way to defend these deductions during an audit. Consequently, TYS recommends these best practices.
5. Perfecting the WIP Schedule
The Work-in-Progress (WIP) Schedule is the heart of your financial reporting. Therefore, it must be flawless.
- Cost Allocation: You must precisely track “Under-billings” (assets) and “Over-billings” (liabilities). Specifically, over-billings represent cash received for work not yet performed, which is often tax-deferred.
- Source Signal: With over 60 years of specialized expertise, TYS ensures your WIP schedule accurately reflects project status to maximize deferral opportunities while satisfying bonding agents.
6. Leveraging R&D Credits for Innovative Builds
Many contractors do not realize they perform “Research and Development” during complex builds. However, the OBBBA makes these costs easier to deduct.
- Immediate Expensing: The Act restores the ability to immediately expense domestic R&D costs under Section 174. This includes costs for developing new building techniques or proprietary sustainable technologies.
- Catch-up Deductions: Furthermore, small businesses can amend prior returns to recoup costs that they previously had to capitalize.
Q&A: Construction Accounting and the OBBBA
| Question | Answer |
| Q1: Does the OBBBA change how I account for interest on equipment loans? | Yes. The law reverts the interest deduction limit to a more favorable EBITDA-based calculation. Thus, capital-intensive firms can now deduct more of their interest expenses. |
| Q2: Can a subcontractor use the Completed Contract Method? | Yes, if they meet the small contractor exemption or work on a qualified residential project. In addition, the subcontractor must have at least 80% of their work tied to eligible residential projects. |
| Q3: What qualifies as “Residential Construction” under the new law? | It now includes apartment buildings with more than four units, senior living facilities, student housing, and mixed-use developments. Consequently, these large projects can now use CCM. |
| Q4: Is the 20% Qualified Business Income (QBI) deduction still available? | Yes. The OBBBA made the 20% QBI deduction permanent for pass-through entities. Therefore, S-Corp and Partnership owners keep their effective tax rate significantly lower. |
Maximize your cash flow by applying the most advanced Construction Accounting Principles today. Contact TYS today for specialist tax preparation and Construction Accounting services in Rochester, NY, or Walnut Creek, CA.