Different accounting methods may apply for long-term construction contracts depending on the amount of the three preceding tax years' gross receipts.

Author:Hammerschmidt, Paul E.
Position:Brief Article

A taxpayer may use the completed contract method to determine the taxable income for a long-term construction contract if - the taxpayer estimates that the contract will be completed within 24 months; and - the taxpayer's average annual gross receipts, for the three tax years preceding the tax year in which the contract is entered into, do not exceed $10 million (Sec. 460(e)(1)).

This rule is called the "small construction contract exception."

To determine whether this exception applies, a taxpayer must look back to only the three tax years preceding the tax year in which a construction contract is entered into. Therefore, it is possible that the percentage of completion method is required for contracts entered into in one year - but the completed contract method may be used for other contracts entered into in a subsequent year. As long as the completed contract method was originally adopted for long-term contracts, the use of the completed contract method for construction contracts entered into in a subsequent year, when the small construction contract...

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