Completed Contract Method Tax Reform

The completed contract method (CCM) has been a popular accounting method for long-term construction contracts. This method allows a taxpayer to defer tax recognition until a long-term contract is completed. However, tax reform legislation has changed the way CCM is applied.

In December 2017, the Tax Cuts and Jobs Act (TCJA) was passed, bringing significant changes to the U.S. tax code. One of these changes was to limit the use of CCM for tax years beginning after December 31, 2017.

Under the new law, CCM can only be used by taxpayers with an average annual gross receipts of $25 million or less for the three prior tax years. This change was made to prevent larger companies from using the deferral method to reduce their tax liability.

For taxpayers who do qualify to use CCM, there are still changes to be aware of. The TCJA also eliminates the use of CCM for contracts that extend beyond two years. This means that for contracts that take longer than two years to complete, taxpayers will have to recognize income and expenses over the course of the project.

Another change under the TCJA is the elimination of the exception for home construction contracts using the CCM method. This exception allowed home builders to use CCM for contracts that extended beyond two years. However, with the new law, home construction contracts must be recognized on a percentage of completion basis.

Overall, the changes to the CCM method under the TCJA are designed to simplify the tax code and prevent larger companies from using tax deferral methods to reduce their tax liability. For taxpayers who do qualify for CCM, it is important to understand the changes and adjust their accounting methods accordingly. Working with a qualified CPA or tax professional can help ensure compliance and maximize tax benefits.