Is Completed Contract Method Allowed for Tax

The completed contract method of accounting is a way of recognizing revenue and expenses for a project only when it is completed. Under this method, revenue and expenses are recorded only when the project is complete, regardless of when the project started.

The completed contract method is a popular method of accounting for companies that work on long-term projects. It helps to ensure that revenue and expenses are accurately recorded for each project, and it simplifies the accounting process.

However, the completed contract method is not allowed for tax purposes under the Internal Revenue Service (IRS) guidelines. Instead, companies must use the percentage of completion method or the completed contract method with the exception of small construction contractors.

The percentage of completion method requires the company to recognize revenue and expenses based on the percentage of the project that is completed. This method is more complex than the completed contract method, as it requires tracking the project`s progress and estimating the percentage of completion at any given time.

The IRS requires the use of the percentage of completion method for companies that generate more than $10 million in average annual gross receipts over the past three years or have contracts that are expected to last more than two years.

Small construction contractors, those that generate less than $10 million in annual gross receipts and have contracts that are expected to last less than two years, are allowed to use the completed contract method for tax purposes.

In conclusion, the completed contract method of accounting is a popular way of recognizing revenue and expenses for long-term projects. However, it is not allowed for tax purposes under the IRS guidelines. Companies must use the percentage of completion method or the completed contract method with the exception of small construction contractors. It is important for companies to understand the IRS guidelines and use the appropriate accounting method to avoid any penalties or legal issues.