Section 460 generally requires taxpayers to use the percentage-of-completion method for long-term construction contracts (those spanning two tax years). The small contractor exception in §460(e) lets a contractor whose average annual gross receipts are under the §448(c) threshold ($32 million for tax years beginning in 2026, adjusted for inflation each year) use another method, such as the completed-contract method or accrual excluding retainage, for contracts expected to finish within two years. Home construction contracts have their own exemption.
Why it matters
The right method can defer a lot of taxable income, but switching methods generally needs IRS consent, and look-back interest can apply to percentage-of-completion contracts.
Worked example
A qualifying small contractor has an $800,000 contract, 60% complete at year end, with $480,000 of GAAP revenue. Under the completed-contract method, none of it is taxable until the job is finished (illustrative).
Common mistakes
- Using the small contractor exception after outgrowing the gross receipts test.
- Recording tax-method adjustments in the GAAP ledger.
How os.construction handles it
The accounting preview has no tax-method view of contract revenue yet; §460 views exist only in the unwired WIP calculator. Confirm methods with your tax advisor. See Financial reports.