Tax Planning for Construction Companies: Completed Contract, Percentage of Completion, and Contractor-Specific Rules

Construction is one of the most complex industries from a tax perspective because the work spans multiple tax years, the costs fluctuate significantly, and the revenue recognition method directly determines when (and how much) taxable income is reported. Under IRC 460, the percentage-of-completion method (PCM) is the mandatory method for most long-term contracts, requiring the contractor to include income each year based on the proportion of work completed, regardless of when the customer pays. The small construction contract exception (available to contractors that meet the IRC 448(c) gross receipts test: average annual gross receipts of $31 million or less for 2025 and $32 million or less for 2026, indexed for inflation) permits the use of the completed-contract method (CCM), which defers all income and costs until the project is finished. The choice between these methods has enormous tax implications: a contractor with multiple overlapping projects can defer hundreds of thousands of dollars in tax by using the CCM (where eligible), while a contractor forced to use the PCM must carefully estimate costs and manage the lookback interest calculation. On top of revenue recognition, construction companies have significant opportunities in equipment depreciation, the R&D credit for process innovations, retainage timing, job-cost accounting, and entity structure optimization.

How do construction tax rules affect you?

Which contractor costs are easy to miss or misclaim?

On a construction company’s return, trucks and job-site travel are where the rules get specific. A pickup you’ve taken bonus or Section 179 on can’t switch to the standard mileage rate, so its actual costs are the deduction. Home to a regular workplace is commuting and generally not deductible, but home to a temporary job site counts if you have a regular work location elsewhere or the site is outside your metro area.

• If your home office is your principal place of business, trips from home to other work locations in the business are deductible too.
• Contractor license renewals and other regulatory fees are deductible, and trade association dues generally are too.
• General liability and workers’ compensation for your crews are deductible. A reserve you set aside to self-insure isn’t, and a multi-year premium paid upfront is deducted year by year.
• For vehicles still on the standard rate, it’s 70 cents a mile for 2025, then 72.5 cents from January to June 2026 and 76 cents from July to December 2026. The standard rate isn’t allowed once you use five or more cars at the same time.

What is the look-back rule for construction contractors?

The look-back rule (IRC 460(b)) applies to long-term contracts reported under the percentage-of-completion method. When a contract is completed, you recalculate income for each prior year as if you had known the actual total contract price and costs from the beginning. If you underreported income in a prior year (because estimated costs were too high), you owe interest on the tax shortfall. If you overreported, the IRS owes you interest. The calculation is done on Form 8697. The de minimis exception exempts contracts completed within 2 years and with a gross price under $1 million from the look-back computation.

What is the completed contract method and when should construction businesses use it?

The completed contract method under IRC 460 defers all income and expense recognition until a construction contract is complete, which can provide significant tax deferral for multi-year projects. Only contracts expected to be completed within two years by companies with average annual gross receipts of $31 million or less (2025 threshold; $32 million for 2026) qualify for the completed contract method under the small contractor exception. Larger contractors must use the percentage-of-completion method, which recognizes income based on costs incurred relative to estimated total costs each year. The completed contract method is advantageous for tax planning because it bundles all profit recognition into the completion year, but it requires accurate cost tracking and the IRS scrutinizes the definition of ‘complete’ closely, generally requiring final acceptance by the customer.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.