Completed Contract vs. Percentage of Completion: Which Method Saves Contractors More?

Key Takeaways

• The completed contract method (CCM) defers tax by recognizing all income when a job finishes, while the percentage of completion method (PCM) recognizes income ratably, as work progresses.
• Small contractors can use CCM for regular tax purposes if they meet the IRS gross receipts threshold and the contract is expected to finish within two years.
• For pass-through entity owners, the alternative minimum tax (AMT) generally requires recalculating CCM income under PCM, which often eliminates the deferral benefit and doubles the accounting work.
• C corporations are generally not subject to this AMT recalculation so that CCM can deliver its full deferral benefit at the federal level for C corporation contractors.
• Home construction contracts meeting the 80% residential cost threshold are exempt from the AMT recomputation requirement, preserving CCM's deferral advantage for qualifying homebuilders.
• The One Big Beautiful Bill Act (OBBBA) expanded this exemption to residential construction contracts (including multiunit projects), effective for tax years beginning after July 4, 2025.

The Question We Hear All the Time

If you own a construction company, at some point, your accountant has probably asked which method you want to use to report income on your tax return: completed contract or percentage of completion. With more tax law changes coming in 2026, that question is back on the table for a lot of contractors who want to make sure they are not paying more tax than they have to.

The honest answer is that the right method depends on your situation. But there is a piece of the analysis that gets missed often enough that it is worth walking through, because it changes the answer for many contractors who assume one method is automatically better.

This article explains the two methods in plain terms, walks through the trap that catches most contractors, and points out the carve-out that flips the answer for homebuilders.

What Are the Completed Contract and Percentage of Completion Methods?

Completed Contract Method (CCM)

Under CCM, you do not report any income or expenses from a job on your tax return until the job is substantially finished. If a project starts in 2026 and finishes in 2027, all of the income shows up on your 2027 tax return. Cash you collect along the way does not trigger tax — completion does.

Percentage of Completion Method (PCM)

Under PCM, you report a portion of the income and expenses each year based on how far along the job is. If a contract is 40% complete at year-end, you report 40% of the expected income and costs on that year's return, even if the job is far from done.

Most contractors prefer CCM when they can use it, for two reasons. The first is timing — pushing the tax bill out a year or two helps with cash flow. The second is simplicity. PCM requires you to estimate the total cost of each contract, calculate how complete it is at year-end, and update those calculations every year. CCM avoids all of that on the tax side.

Cash or Accrual Basis Methods

It is worth noting that CCM and PCM are not the only options for reporting contract income. Small contractors who meet certain thresholds can also use the cash basis or accrual basis methods for their long-term contracts, and each comes with its own tradeoffs. This article focuses on CCM versus PCM because that is the comparison most contractors are weighing, but a full method analysis with your tax advisor should consider all of the available options.

Who Can Use CCM for Regular Tax Purposes?

CCM is not available to every contractor. To use it for regular tax purposes, you generally have to meet two requirements:

1. Small contractor status. Your organization has to be considered a small contractor under the IRS gross receipts test. The threshold is adjusted for inflation each year, and it looks at average annual gross receipts over the three prior tax years. Currently, the average annual gross receipts threshold is $32M.
2. Two-year contract expectation. The contract itself has to be expected to be completed within two years of when it begins.

Contractors above the gross receipts threshold or working on projects expected to run longer than two years are required to use PCM regardless of preference. Home construction contracts have their own set of rules and are addressed separately below.

The AMT Trap

Here is the part most contractors do not see coming.

Even if you use CCM on your regular tax return, the IRS generally requires you to recalculate your income under PCM for purposes of the alternative minimum tax, or AMT. AMT is a parallel tax system designed to make sure that taxpayers who use certain deductions or deferrals still pay a minimum amount of tax, which is generally about 28%. If your AMT calculation produces a higher tax than your regular tax, you pay the difference.

For a contractor on CCM, this often means the deferral benefit gets clawed back through the AMT system. You thought you were pushing the tax bill out a year by using CCM, but the AMT calculation pulls the PCM income back in, and you end up paying tax on it anyway.

And here is the second part of the trap: if you have to calculate PCM for AMT, the simplicity argument for CCM disappears. You are now running two sets of numbers on the same contracts — CCM for regular tax, PCM for AMT — and paying the AMT amount. You did double the accounting work and ended up in roughly the same place.

This is the analysis most contractors have not done when they tell their accountant they want to be on a completed contract.

Does the AMT Apply to C Corporation Contractors?

The AMT problem described above applies to individuals, which means it applies to most contractors organized as S corporations, partnerships, LLCs, or sole proprietorships, because in those structures the income flows through to the owner's personal return.

It does not apply to C corporations. The corporate AMT was repealed for most C corporations under the 2017 Tax Cuts and Jobs Act (TCJA) and has not been reinstated for the typical construction company. If your construction company is a C corporation, the AMT issue on long-term contracts generally goes away, and CCM can deliver its full deferral benefit on the federal tax side.

This is one of several reasons why entity choice matters for contractors, and it is worth raising with your tax advisor if you are evaluating your structure.

If You Issue Financial Statements

One more layer to be aware of relates to financial statements. If your construction company issues financial statements — for your bank, your bonding company, or anyone else — those statements generally have to follow generally accepted accounting principles, or GAAP. For most long-term construction contracts, GAAP effectively requires PCM on your financial statements.

That means if you elect CCM for your tax return, you are running PCM on your books for financial reporting and CCM on your tax return — two completely separate income calculations on the same contracts. If you are also subject to AMT, that becomes three views of the same income.

Some contractors decide the tax deferral is worth the additional accounting effort. Many do not, once they see what is involved.

Are Home Construction Contracts Exempt from the AMT Recomputation?

There is one important exception to the AMT recomputation rule, and it matters a lot if you build homes.

Home construction contracts are exempt from the requirement to recalculate income under PCM for AMT purposes. The general definition is that 80% or more of the estimated total costs of the contract relate to the construction, improvement, or rehabilitation of residential dwelling units. For residential builders who meet that test, the AMT issue goes away, and CCM delivers the deferral benefit cleanly.

Commercial contractors do not get this carve-out. Mixed-use projects need a closer look at the cost composition of each contract to figure out whether the 80% threshold is met.

How to Choose the Right Accounting Method for Your Construction Company

The choice between completed contract and percentage of completion is one of the more consequential tax decisions a construction company owner makes, and the right answer is rarely obvious without running the numbers. If you are looking to analyze your accounting method, please reach out to the EisnerAmper Construction team.

This article was prepared with AI assistance and edited and enhanced by EisnerAmper professionals for accuracy and completeness. All technical content, analysis, and recommendations reflect the knowledge of our team.