Overview of Tax Law Changes impacting Long-Term Construction Contracts
The Tax Cuts and Jobs Act (TCJA) changed some important aspects of the tax law for construction contractors regarding the accounting for long-term contracts. Any contract that is started in one year and ends in another is considered a long-term contract. Long-term contracts are generally accounted for using the completed contract method (CCM), or the percentage of completion method (PCM). The CCM is the more simple calculation, because you do not recognize any revenue or related costs for a project that is under 95% complete. Using the PCM, requires that you recognize the income or loss on the contract based on the percentage of the contract completed. If the contract is 50% complete at the end of the year, you will recognize 50% of the income or loss on that specific contract.
Before TCJA, construction companies with average gross receipts of $10 million or less for the three prior years did not have to use the PCM. Companies under the threshold generally use the CCM. However, those companies were still required to use the PCM to recalculate the income for alternative minimum tax (AMT) purposes. This AMT adjustment could significantly impact a taxpayers return.
With the passage of TCJA, the average gross receipts threshold increased to $25 million. More taxpayers will be exempt from using the PCM. This change will affect contracts entered into after Dec. 31, 2017. You no longer have to use the PCM if the company is under the gross receipts threshold and the contract is expected to be completed within two years of the contract’s inception. Taxpayers who do not use the PCM still need to calculate it for AMT purposes. This part of the law does not change, and there will still be an AMT adjustment for long-term contracts. However, fewer taxpayers will be subject to AMT under the new provisions.