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Trusted Accounting Services

Businesses in the construction industry deal with unique issues and have unique tax planning opportunities.​

On the accounting side, tracking job profitability is necessary if you want to understand your company's financial performance.​

Cash management is paramount to keeping the organization healthy.

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In General

Construction Contracts: Long-Term Contracts

The term "construction" is liberally construed. Almost any activity that adds to the value of real property may be treated as construction.

Long-term contracts are contracts for the manufacture, building, installation, or construction of property, where the contract is not completed within the tax year in which it is entered into.  To be a long-term contract, the contract must involve the manufacture of a unique item that is not normally included in finished goods inventory, or of an item that normally requires more than 12 months to produce. The percentage of completion method is required for most long-term contracts. The completed contract method may be used in some instances.


Percentage of Completion Method (PCM); Completed Contract Method (CCM)

A taxpayer using the PCM includes an amount in income based on the percentage of the contract completed as of the end of the year, and deducts all costs incurred during the year. The PCM is determined by comparing costs allocable to the contract and incurred as of the end of the year with estimated total contract costs. The taxpayer includes a portion of the projected income from the contract in income for that year, based on this percentage. However, a taxpayer can elect not to recognize any income until 10 percent of the contract has been completed.


Under the CCM, the gross contract price is included in income when the contract is completed and accepted; expenses are deducted at that time. The use of either of these methods supersedes the use of the cash method, which would otherwise be available for construction contracts that do not have inventories.

Long-Term Contracts

Long-term contracts for tax law recognition-of-income purposes are contracts for manufacturing, building, installing or constructing property that are not completed in tax year in which they are entered into.  A contract is considered to be for building, installation or construction of property if it provides for the erection of a structure, such as a building, oil well or other improvements, bridge, railroad or highway, or large industrial machine.


Taxable income from long-term contracts generally must be determined using the percentage of completion method.   Under the percentage-of-completion method, gross income is reported annually according to the percentage of the contract completed in that year. The completion percentage must be determined by comparing costs allocated and incurred before the end of the tax year with the estimated total contract costs (cost-to-cost method or simplified cost-to-cost method).  

Contract Review

A taxpayer who has entered into a small construction contract or home construction contract, however, may use an exempt contract method of accounting.

Domestic Production Deduction (Pre-2018)

Code Sec. 199: Benefits and Burdens

The Code Sec. 199 domestic production activities deduction (DPAD) can be particularly beneficial. The deduction equals nine percent of income from the manufacture or production of qualified property. Qualified property generally is tangible personal property.


The taxpayer must own the property while it is being produced. While ownership is not an issue in many cases, it is important for taxpayers that enter into a contract manufacturing arrangement. In a contract manufacturing arrangement, one party contracts with another, unrelated party to produce the property for which the deduction is claimed. 


Ownership depends on who the benefits and burdens for the property, at the time that the property is manufactured or produced. Determining benefits and burdens depends on all the facts and circumstances. Recent developments have spotlighted the issue of benefits and burdens under Code Sec. 199. These include a Tax Court decision, ADVO, Inc., 141 TC No. 9 (2013), and an IRS Large Business & International Division directive, LB&I-04-1013-008 (2013).

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