As a construction contractor, choosing the right accounting method can significantly impact your cash flow, tax liability, and financial reporting. The rules vary based on contract size, duration, and recent legislative changes. If your average annual gross receipts exceed $31 million, you're generally required to use the Percentage of Completion Method (PCM). Smaller contractors may be eligible to use an exempt contract method for their long-term contracts, but understanding the nuances of each method is key to aligning your accounting practices with your business goals.

To help you navigate your options and take full advantage of the changes to residential contracts under the One Big Beautiful Bill Act (OBBBA), this guide outlines five key accounting methods available to contractors, how each one works, and what to consider when choosing the best fit for your business. Understanding these methods can help you optimize tax outcomes and strengthen financial performance.

1. Percentage of Completion Method

Who it applies to:

• Contractors with average annual gross receipts over $31 million
• Businesses engaged in long-term contracts

How it works:

• Income and expenses are recognized as the project progresses, using the following calculations:
  
  • Percentage Complete = Actual Costs to Date ÷ Total Estimated Contract Cost
  • Recognized Income = Estimated Gross Profit × Percentage Complete

Advantages:

• Aligns income with project progress for a more accurate reflection of taxable income
• Smooths income recognition over time, avoiding large swings as long as your estimates are accurate

Challenges:

• Requires detailed cost tracking
• Can accelerate income recognition before receipt of payment

Planning Opportunities:

• 10% Deferral Method: Delays income recognition until 10% of costs are incurred, improving cash flow early in a contract
• Percentage of Completion-Capitalized Cost Method (PCCM):
  
  • Historically, a partial exemption existed for residential construction contracts where qualifying taxpayers could use PCCM
  • PCCM allowed 70% of income to be recognized under PCM and 30% under an exempt method such as the Completed Contract Method (CCM) or cash
  • Eligibility was based on projects involving buildings with more than four dwelling units, such as apartments
  • See OBBBA’s expanded definition of residential contracts later in this guide

2. Completed Contract Method

Who it applies to:

• Previously limited to home construction contracts and small contractors under the gross receipts threshold
• Contracts expected to be completed within two years
• Land developers and subcontractors under IRC Section 460(e)
• Expanded under the OBBBA to include a broader range of residential construction contracts after July 4, 2025

How it works:

• Income and expenses are deferred until the contract is completed

Advantages:

• Maximizes tax deferral by postponing income recognition
• Offers flexibility in timing of income and expense
• Improves short-term cash flow – especially beneficial for growing contractors

Challenges:

• Not allowed for larger contractors
• May cause income spikes when multiple projects finish in the same year
• Less alignment with actual project progress
• May cause alternative minimum tax (AMT) exposure for pass-through entity owners

3. Cash Method

Who it applies to:

• Small contractors under the gross receipts threshold

How it works:

• Income is recognized when received; expenses are recognized when paid

Advantages:

• Typically defers taxable income compared to PCM, improving cash flow

Challenges:

• May distort financial results due to mismatched timing

4. Accrual Method

Who it applies to:

• Small contractors under the gross receipts threshold

How it works:

• Revenue is recognized when earned (billed), and expenses when incurred

Advantages:

• Matches income and expenses more accurately
• Allows retainage deferral in some cases

Challenges:

• Overbilling inflates reported income
• Accelerates tax liability
• Accrual Less Retainage

Who it applies to:

• Small contractors under the gross receipts threshold

How it works:

• Revenue is recognized when earned, excluding retainage (withheld amounts) until received
• Costs are recognized when incurred, excluding retainage payable until paid

Advantages:

• Defers taxable income from unpaid retainage
• Reflects economic reality more accurately

Challenges:

• Requires precise tracking of retainage terms
• May complicate revenue recognition
• Not applicable to all contract types

5. Strategic Opportunity for Contractors

If you work in residential construction, recent changes under the OBBBA present a valuable opportunity to improve cash flow and simplify tax reporting. Starting with contracts entered into in tax years beginning after July 4, 2025, qualifying contractors may use an exempt contract method, such as CCM or cash basis, instead of PCM or PCCM. This can significantly defer taxable income.

What’s new under the OBBBA?

• Home construction contract replaced with a broader residential contract exception
• The definition of residential contracts now includes multifamily projects, senior living, student housing, and more
• Small contractor exception expanded to contracts of three years or less

Steps to take advantage of this change:

• Evaluate whether your contracts qualify under the new exemption
• File Form 3115 to formally change your accounting method
• Apply the change on a cut-off basis (only to new contracts after the effective date)
• Note that no § 481(a) adjustment is required or permitted

For more information on how the OBBBA impacts contractors, read our related article.

We Can Help

Our Construction team specializes in selecting and implementing accounting methods and tax strategies tailored for contractors. We help businesses identify opportunities, navigate IRS rules and filing requirements, and align accounting practice with broader financial goals.

Let’s explore how your accounting method can support smarter tax planning and stronger financial performance. Contact us today.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

EDIT: This article originally published on Feb 4, 2025, and has been updated to reflect the latest developments in U.S. tax reform.

As we approach the end of 2025, charitable giving is often top of mind for individuals looking to implement philanthropic tax strategies. New tax reform passed on July 4, 2025, gives individuals more incentive to carefully consider their giving this year.

Charitable giving can play a meaningful role in tax planning, allowing individuals and families to reduce taxable income, address estate tax concerns, and create a lasting legacy. Thoughtful planning helps align donations with financial goals while maximizing their impact.

Planning now for the 2025 tax year-end, as well as looking ahead to 2026, allows for better coordination with advisors, strategic selection of charitable recipients, and full utilization of available tax benefits before deadlines approach.

Tax Considerations for 2025

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced several provisions originally set to expire at the end of 2025. However, the signing of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, extended or modified key elements, including:

• Estate and Gift Tax Exemption – Previously set to decrease after 2025, the exemption was just under $14 million per person for 2025. The OBBBA increases the exemption to $15 million per person starting in 2026.
• Charitable Contribution Limits – The OBBBA preserves the current deduction limit for cash donations to public charities at 60% of adjusted gross income (AGI), which was originally set to decrease to 50% in 2026.

Given these updates, individuals should revisit their estate and charitable giving plans to align with the new thresholds and take full advantage of available estate and income tax planning opportunities.

New Deduction Rules Coming in 2026

Starting in 2026, two new limitations will apply to charitable gift deductions:

·         0.5% MAGI Floor – Only charitable donations exceeding 0.5% of Modified Adjusted Gross Income (MAGI) will be deductible. For example, if your MAGI is $1,000,000, the first $5,000 of donations will not qualify for a deduction.

·         35% Cap on Tax Benefit – The maximum tax benefit rate for top-bracket (37%) taxpayers will be capped at 35%.

These changes make 2025 a critical year for strategic giving. Accelerating donations before the new rules take effect can help maximize tax benefits.

For further information, please see our related article: What the One Big Beautiful Bill Means for High-Net-Worth Individuals.

Tax-Advantaged Giving Strategies

Below are a few approaches that can help customers structure charitable giving to enhance philanthropic efforts while maximizing tax benefits.

• Donating Appreciated Securities – Instead of giving cash, this straightforward and effective tax-saving strategy can allow donors to claim a deduction based on the market value of the securities and avoid paying capital gains taxes. The charity can then sell the securities and keep the full proceeds. For further information, please see our related article: Trends in Charitable Giving: Tax Advantages of Stock and Cash Donations.
• Gifts of Full or Partial Interest in Property – This approach may help reduce taxable income and capital gains exposure. Note that these gifts require careful planning, so consulting a tax advisor before donating an interest in property is recommended.
• Donor-Advised Funds (DAFs) – A flexible and tax-efficient way to give, DAFs allow donors to contribute cash, stocks, or other assets while receiving an immediate tax deduction. The funds are managed by a sponsoring organization and can be distributed to charities over time while growing tax-free.
• Qualified Charitable Distributions (QCDs) – Individuals aged 70½ or older can donate directly from a traditional Individual Retirement Account (IRA) to a qualified charity, up to a certain limit, without increasing taxable income. This strategy also satisfies required minimum distributions (RMDs) while supporting charitable goals.
• Deferred Donations Through Charitable Remainder Trusts – These trusts allow donors to retain some benefit from donated assets while deferring the transfer to the charity. Donors can take an immediate tax deduction for the present value of the donation to reduce capital gains taxes. These trusts require detailed planning and consultation with tax and legal advisors.

Charitable Giving Pitfalls to Avoid

To maximize the impact of charitable donations, it’s important to avoid mistakes that could reduce their effectiveness.

• Failing to Research Charities – Donors should ensure the organizations they support are financially sound and aligned with their philanthropic goals. Without proper research, funds may not be used as intended.
• Overlooking Tax Implications – Contributing assets without considering tax effects may result in missed deductions or unexpected liabilities. Proper planning helps donors take full advantage of available tax benefits.
• Overcommitting Financially – While generosity is admirable, donors should balance giving with long-term financial stability to avoid potential financial strain.
• Ignoring Economic Factors – Market volatility and interest rate fluctuations can affect the value of donated assets and the overall giving capacity. Understanding these conditions helps donors time contributions more effectively.

By carefully planning, consulting with advisors, and selecting the right charitable vehicles, donors can make the most of their giving while avoiding unnecessary risks.

We Can Help

The strategies listed above are just a few of the tax-efficient options available to achieve philanthropic goals. Many can be customized to fit a family’s financial situation and giving preferences. Our advisors can also coordinate giving with estate planning, helping individuals preserve wealth for future generations while supporting meaningful causes.

Contact our team at Elliott Davis today to explore these strategies or discuss additional options tailored to your needs.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

The One Big Beautiful Bill Act (OBBBA) temporarily quadruples the state and local tax (SALT) deduction cap from $10,000 to $40,000 ($20,000 for single and separate filers) starting in 2025, with 1% annual increases through 2029. However, this relief is short-lived as the cap snaps back to $10,000 in 2030.

For high-income taxpayers, the deduction begins to phase out once modified adjusted gross income (MAGI) exceeds $500,000 and disappears entirely once MAGI reaches or exceeds $600,000 (MAGI thresholds are halved for single and separate filers). That phaseout can trigger a steep spike in your effective tax rate.

Why Itemizing Might Be Back

The SALT deduction is available only to taxpayers who itemize. Under the Tax Cuts and Jobs Act (TCJA), which nearly doubled the standard deduction and capped deductible SALT expenses at $10,000, the number of taxpayers who itemize dropped substantially. Now, under the OBBBA, the standard deduction is even higher — for 2025, it’s $15,750 for single and separate filers, $23,625 for heads of household filers, and $31,500 for joint filers.

However, the higher SALT cap might make it worthwhile for some taxpayers who have been claiming the standard deduction to start itemizing again. Consider, for example, a taxpayer who pays high state income tax. If that amount combined with other itemized deductions exceeds the applicable standard deduction, the taxpayer will save more by itemizing.

MAGI Management Tips

Deductible SALT expenses include property taxes and either income tax or sales tax, but not both. If you opt for sales tax rather than income tax, the IRS Sales Tax Deduction Calculator can estimate your deduction without tracking receipts.

The increased SALT cap could lead to major tax savings. For example, a single filer in the 35% bracket with $40,000 in SALT expenses and MAGI below the $500,000 threshold could save an additional $10,500 [35% × ($40,000 − $10,000)]. However, if a taxpayer’s MAGI is over the threshold by $60,000, the maximum SALT deduction drops to $22,000 [$40,000 – (30% x $60,000)], which is still more than double the original $10,000 limit.

To preserve your deduction, you may consider reducing MAGI through pre-tax 401(k), Health Savings Account (HSA), and/or self-employed retirement contributions. Conversely, you may also want to avoid moves that will raise MAGI like Roth Individual Retirement Account (IRA) conversions, large capital gains, or equity compensation.

Since the higher cap is temporary, it may be worth maximizing your SALT deduction every year it’s available. For example, if your MAGI is below the threshold for 2025, you may benefit from pre-paying your assessed property tax bill this year to boost your current deduction.

Note: Pass-through entity tax (PTET) elections remain a viable workaround. More than 36 states allow pass-through businesses to pay state income tax at the entity level, bypassing the SALT cap for owners. However, some PTET laws are set to expire after 2025, and renewal isn’t guaranteed.

Considerations for AMT

SALT expenses aren’t allowed under the alternative minimum tax (AMT), which can result in a higher tax bill for some taxpayers. Since individuals must calculate their taxes under both the regular system and the AMT and pay the higher amount, large SALT deductions can unexpectedly push certain taxpayers into AMT territory.

The OBBBA makes the higher AMT exemption amounts permanent, but it also lowers the phaseout threshold for joint filers beginning in 2026. These changes could increase AMT exposure for high-income taxpayers, especially those with significant SALT deductions.

Tax Planning Example

If your MAGI falls between $500,000 and $600,000 and you have high SALT expenses, your deduction may shrink as your income rises.

For example, with $600,000 of MAGI and $40,000 of SALT expenses, you may only be able to deduct $10,000 compared to the full $40,000 if your MAGI were $500,000. That $100,000 MAGI increase effectively raises your taxable income by $130,000, due to the reduced deduction.

We Can Help

The OBBBA’s changes to the SALT deduction cap, and their ripple effects across MAGI, itemization, PTETs, and AMT require a fresh look at your tax strategy. At Elliott Davis, we help high-net-worth individuals and business owners model the impact and optimize deductions.

Contact us today to chart the best course for reducing your tax liability during this four-year window.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.