Construction Tax
Method, timing, and the decisions made early
On long contracts, the method you use to recognise revenue decides when you pay tax, sometimes by a wide margin. Most contractors inherited a method chosen years ago at a different size and have never revisited it.
Where it goes wrong
Construction tax strategy
IRC 460 decides when you pay, and it was decided at a different size
Long-term contracts generally fall under IRC 460, which requires percentage-of-completion unless an exception applies. The small contractor exception is the one that matters most, and whether you qualify turns on contract duration and your average gross receipts. A method that fitted years ago can now be accelerating tax on work you have not finished.
Changing method is a filing, not a decision
If the right method is not the one you are using, moving is a formal accounting method change on Form 3115, with a section 481(a) adjustment to stop income being counted twice or missed. It is very doable and it is not something to discover in March.
IRC 263A pulls costs onto the balance sheet
Uniform capitalisation requires certain indirect costs to be capitalised into contracts rather than expensed as incurred. Contractors who expense everything as it is paid can be understating work in progress and overstating current deductions, which is a timing problem that compounds.
Look-back arrives after the fact
Where completed long-term contracts require it, look-back recomputes tax as though every estimate had been exactly right and settles interest in whichever direction the difference falls. It is a compliance obligation rather than an option, and it surprises contractors who did not plan for it.
Equipment timing is decided by the dealer
Whether a purchase lands its deduction where it helps depends on your income and your tax year, not on when the salesman has stock. Bought without a plan, a large purchase can produce a deduction in a year that needed it least.
Work crosses state lines before the filings do
Taking a contract in a new state can create income tax, payroll, and sales and use obligations at once. These tend to be discovered late, which is when they carry penalties rather than choices.
What this covers
What arrives, and when
- Method election reviewed under IRC 460, including whether the small contractor exception applies to you
- Form 3115 prepared where a method change is the right answer, with the section 481(a) adjustment handled
- IRC 263A uniform capitalisation reviewed, so indirect costs land where they belong
- Look-back computed and filed where completed long-term contracts require it
- Equipment and vehicle purchases timed against income, planned before year end
- Entity structure across operating, equipment-leasing, and real estate entities
- Reasonable compensation, retirement vehicle, and accountable plan set and documented
- Multi-state income, payroll, and sales and use exposure mapped as work crosses lines
- A tax position reviewed quarterly, so decisions are made while they can still change the outcome
This sits inside one engagement rather than being sold as a line item. What it costs depends on your contract volume, your entity and payroll-state count, and how much of the compliance substrate sits with us. We scope it against your numbers and put it in writing before you commit.
How the engagement worksQuestions
What contractors ask about this
Which revenue recognition method should a contractor use?
Long-term contracts generally fall under IRC 460, which requires percentage-of-completion unless an exception applies. The small contractor exception turns on contract duration and average gross receipts, and the thresholds are adjusted over time, so it is worth checking against current figures rather than assuming. Completed-contract defers income until the job finishes and can be a large timing advantage where you qualify. The right answer is specific to your contract mix and worth deciding deliberately rather than inheriting.
What is Form 3115 and when would a contractor need one?
Form 3115 is the application to change an accounting method. If you are on the wrong revenue recognition method, or your treatment of indirect costs under IRC 263A needs correcting, the change is made formally on Form 3115 rather than by simply starting to do it differently. It carries a section 481(a) adjustment that prevents income being double counted or dropped in the year of the change.
How should a contractor structure entities?
It is common to separate the operating company from an equipment-leasing entity and from any real estate the business occupies. Done properly it can improve liability separation, make equipment and property decisions cleaner, and give more control over how income is characterised. Done casually it creates intercompany messes and a surety that cannot read the group. The structure should follow how the business actually operates.
What is look-back and does it apply to us?
Look-back applies to certain long-term contracts. When a contract completes, tax is recomputed as though the estimates had been exactly right, and interest is settled in whichever direction the difference falls. Whether it applies depends on your method, your contract length, and your size. It is a compliance obligation rather than an option, and it is better planned for than discovered.
When should we buy equipment for the best tax outcome?
Qualifying equipment can generally be deducted in the year it is placed in service rather than depreciated over many years, through bonus depreciation or a Section 179 election. What the deduction is actually worth depends on your income that year and the timing against your tax year, which is why the purchase is worth planning before year end rather than reviewing at filing.
What happens when we take work in another state?
A contract in a new state can trigger income tax registration, payroll withholding, and sales and use obligations, sometimes from the first day of work. The rules vary by state and by the nature of the contract. Mapping it before the crew mobilises turns a compliance problem into a planning one.
The rest of the engagement
This does not work on its own
WIP reporting and bonding capacity
Work-in-progress schedules, over- and under-billing analysis, and bonding capacity support for commercial contractors. Presented the way a surety underwriter reads it.
Subcontractor and payroll compliance
Certified payroll, prevailing wage, lien waivers, insurance certificates, 1099s, and worker classification review for commercial construction contractors.
CFO advisory for contractors
Cash forecasting on draws and retainage, contract margin against estimate, and decision modelling for commercial construction contractors. Advisory that comes out of running the function.
Find out what your position actually looks like
Bring your current schedule and your last two years of statements. We will tell you what a surety sees, what is holding your capacity down, and what the work to fix it looks like.
Talk through your position