OBBBA & The Completed Contract Method for Residential Construction Clients

The construction industry is experiencing a major change with the recent tax updates. The recently enacted One Big Beautiful Bill Act (P.L. 119-21) expands the Completed Contract Method (CCM) of accounting to residential construction contracts, significantly broadening who can defer income recognition under Internal Revenue Code (IRC) §460. Under this act, construction of apartments with more than four units, condominiums, townhouses, senior living, student housing, and mixed-use building developments all qualify as a residential construction contract. This change, effective for contracts entered into in tax years beginning after July 4, 2025, allows many residential builders and developers to use CCM for the first time, potentially reducing tax burdens and improving cash flow.

What Is the Completed Contract Method?

Under the Completed Contract Method, taxpayers recognize all contract revenue and costs only when the project is complete. This deferral method contrasts with the Percentage-of-Completion Method (PCM), which requires income to be recognized as work progresses. Historically, CCM has been limited to small construction contracts and home construction contracts. Small construction contracts are contracts that meet two criteria: the contract is expected to finish within two years, and contracts that meet the $25 million gross receipts test. Home construction contracts are projects where at least 80% of costs relate to buildings with four or fewer dwelling units such as single-family homes or small townhome clusters. This meant that builders of larger multifamily or apartment projects typically had to use PCM, recognizing taxable income long before receiving payment or project completion.

What the OBBBA Expansion Act Changes

The One Big Beautiful Bill Act expands IRC §460(e)(1) to include residential construction contracts in the list of contracts exempt from the long-term contract rules. Residential construction contracts are those in which at least 80% of the total project costs are expected to come from building, rebuilding, or improving dwelling units such as apartment buildings, condominiums, or other multi-unit housing, as well as from improvements directly connected to those dwellings. In other words, projects with more than four dwelling units, which were previously required to use PCM, may now qualify for CCM beginning with contracts entered into after July 4, 2025.

Why This Matters

The ability to use the Completed Contract Method gives residential builders greater timing flexibility for income recognition and potential tax deferral. By allowing income to be recognized only at project completion, CCM improves cash flow by deferring income taxes until the end of the contract and aligns taxable income more closely with actual receipts. It can also simplify accounting since revenue and costs are recognized together rather than progressively, and it may reduce volatility in annual taxable income for large, multi-year developments. While CCM can be advantageous, it must be applied consistently to all qualifying contracts, and certain alternative minimum tax (AMT) rules may still require PCM adjustments. However, beginning after July 4, 2025, residential construction contracts are excluded from the AMT PCM requirement, further enhancing the value of this expansion.

Planning Considerations

Contractors and developers should begin preparing now to take advantage of the new rules. It is important to identify which future projects may qualify as residential construction contracts under the updated definition and to model the potential tax impact of switching from PCM to CCM. When the new law becomes effective, taxpayers may need to file a change in accounting method with the IRS, which will likely be allowed under automatic change procedures. Additionally, contractors should coordinate with lenders, bonding agents, and other stakeholders to ensure that financial reporting requirements are consistent with any method change.

What This Means for You

The One Big Beautiful Bill Act's expansion of the Completed Contract Method marks a meaningful shift for the residential construction sector. By extending CCM to projects with more than four dwelling units, this act offers contractors new opportunities to manage taxable income and align revenue recognition with project completion. Contact HLB Gross Collins today to evaluate how this expansion could improve tax efficiency and cash flow management for upcoming projects in your company.