Who Can Use the Completed Contract Method for Tax?

Three groups can use the completed contract method for federal tax purposes: construction contractors who pass a gross receipts test and expect the project to finish within two years, builders working on residential construction, and shipbuilders electing the method under a legacy provision of the Revenue Act of 1987. Tax shelters are barred from using it no matter their size or project type.¹

Everyone else with a long-term contract has to use the percentage-of-completion method, which reports income proportionally as the work gets done each year.² The three categories below are the exceptions.

Small Construction Contractors

This is the most common route. Under Section 460(e)(1)(B), a construction contractor qualifies if two conditions are both true at the moment the contract is signed:

The contractor estimates the project will be completed within two years, and
The contractor passes the gross receipts test under Section 448(c).

For tax years beginning in 2026, the gross receipts test is met if average annual gross receipts over the three preceding tax years do not exceed $32 million.³ The threshold is adjusted annually for inflation, so a contractor whose average sits near the line has to recheck eligibility every year.

Both prongs must be met together. A contractor averaging $20 million a year cannot use the method on a project expected to take three years. A contractor whose every job wraps in six months still cannot use it if receipts exceed the threshold. The two-year estimate is judged at signing, not in hindsight, so an unexpected delay that pushes the job past two years does not retroactively disqualify the contract.¹

“Construction contract” here covers building, reconstructing, rehabilitating, or installing integral components of real property, plus improvements to real property. That reaches commercial buildings, roads, bridges, renovations, and site work. It does not reach contracts for personal property like equipment or machinery, which fall under the manufacturing rules instead.¹

The Contract Also Has to Be “Long-Term”

None of this matters unless the contract itself qualifies as long-term under Section 460(f). A contract meets that definition if it involves building, installing, manufacturing, or constructing property and is not completed within the same tax year it was entered into. A project starting in November and finishing the following February qualifies, even though the physical work took only a few months.¹

The statute also lets the IRS treat interdependent contracts as one, or break up a single contract that is really several agreements bundled together. Splitting a big project across multiple contracts to game the two-year window is not a reliable strategy.

Residential Builders

Residential construction gets the broadest exemption. Under Section 460(e)(1)(A), any residential construction contract is exempt from the percentage-of-completion requirement no matter the builder’s gross receipts or expected project duration. A homebuilder generating $100 million a year can still use the completed contract method on qualifying residential projects.¹

Home Construction Contracts

Within residential construction, “home construction contracts” is the narrower category. It requires 80 percent or more of estimated total contract costs to be attributable to dwelling units in buildings containing four or fewer units, plus site improvements directly related to those units such as driveways, landscaping, or utility hookups. Each townhouse or rowhouse counts as a separate building, so a row of six attached townhouses is six one-unit buildings, not one six-unit building.¹

Home construction contracts carry an extra advantage beyond the basic exemption: they are also exempt from the alternative minimum tax adjustment that applies to other long-term contracts. More on that below.

Larger Residential Projects

A residential contract that does not meet the home construction definition — an apartment complex with more than four units per building, for instance — still qualifies for the percentage-of-completion exemption under Section 460(e)(1)(A). But if that larger residential contract also fails the two-year and gross receipts test, the cost capitalization rules under Section 263A still apply.¹

The 80-percent cost test is the line between residential and commercial treatment, so mixed-use projects need careful cost tracking. On a building with ground-floor retail and upper-floor apartments, the builder has to determine whether 80 percent of estimated costs are attributable to the residential portion before classifying the contract.

Qualified Ship Contracts

A narrow election exists for shipbuilders. Section 10203(b)(2) of the Revenue Act of 1987 lets taxpayers constructing seagoing vessels within the United States elect the completed contract method for qualifying ship contracts. The election can apply to a portion of the contract while the remainder is reported under standard rules.⁴

Ship contracts are the only non-construction, non-residential category that still permits this election.

Who Is Excluded

Tax shelters cannot use the method, full stop. The statute borrows the tax shelter definition in Section 461(i)(3), which reaches syndicated partnerships and other arrangements whose principal purpose is tax avoidance. An entity that meets that definition is barred from the completed contract method for any construction contract, even if its receipts sit well below $32 million and every project wraps in a year.¹

Contractors whose average gross receipts exceed $32 million also cannot use the method on non-residential projects, regardless of how fast the projects finish. The gross receipts test and the two-year estimate are both mandatory for the small contractor exemption. Large contractors on commercial jobs must use percentage-of-completion.

Manufacturers face a tight filter of their own. A manufacturing contract counts as long-term only if it involves a unique item not normally held in finished goods inventory, or an item that typically takes more than 12 calendar months to produce regardless of what the contract allows. A company mass-producing standardized parts cannot use the method just because a large order happens to straddle two tax years.¹

Aggregation With Related Businesses

The $32 million threshold is not tested in isolation. Under Section 448(c)(2), related businesses have to combine their gross receipts. This blocks the strategy of splitting operations across multiple entities to slip under the limit.

Receipts must be aggregated for entities treated as a single employer under three groupings:

Controlled groups of corporations under Section 1563(a), covering parent-subsidiary, brother-sister, and combined groups.
Commonly controlled trades or businesses under Section 52(b), which reaches sole proprietorships, partnerships, trusts, and estates sharing common ownership or control.
Affiliated service groups under Section 414(m), covering organizations that regularly perform services for or with each other.

For sole proprietors and single-member LLCs, the gross receipts test applies as if each trade or business were a separate entity, but common-control aggregation still applies if those businesses are linked to other entities under one of the groupings above.¹

Being Eligible Doesn’t Solve AMT

One boundary worth flagging. Qualifying to use the completed contract method for regular tax does not exempt you from the alternative minimum tax calculation. Under Section 56(a)(3), a taxpayer must use percentage-of-completion to compute alternative minimum taxable income on any long-term contract entered into on or after March 1, 1986. That means running a parallel calculation and reporting the difference as an adjustment.⁵

Home construction contracts under Section 460(e)(4) are exempt from this AMT adjustment. Small C corporations are also exempt from the AMT entirely under Section 55(e). Pass-through entities working on larger non-residential projects should watch this most closely, because the AMT adjustment can produce a tax bill in a year when no income has been recognized for regular tax purposes.⁵

How an Existing Business Elects the Method

A business already using another method files Form 3115, Application for Change in Accounting Method. The designated automatic accounting method change number for switching to an exempt contract method under Section 460(e)(1)(B) is 236.⁶ Form 3115 is filed with the taxpayer’s timely filed federal income tax return for the year of the change.⁷

A new business choosing the completed contract method from inception does not need to file Form 3115. The election is made simply by reporting contract income on the first tax return using the method.

The switch operates on a cut-off basis. Contracts already in progress stay on the old method, and only contracts entered into on or after the year of change use the new one. There is no Section 481(a) adjustment restating prior-year income, which simplifies the transition but usually means running two methods in parallel until older contracts finish.¹

1
Office of the Law Revision Counsel. 26 USC 460 – Special Rules for Long-Term Contracts
2
Internal Revenue Service. Land Developers and Subcontractors – Proper Method of Accounting
3
Internal Revenue Service. Rev. Proc. 2025-32
4
Internal Revenue Service. Notice 89-15
5
Office of the Law Revision Counsel. 26 USC 56 – Adjustments in Computing Alternative Minimum Taxable Income
6
Internal Revenue Service. Rev. Proc. 2025-23
7
Internal Revenue Service. About Form 3115, Application for Change in Accounting Method