Major Tax Benefit For Residential Contracts Won Through The One Big Beautiful Bill

July 10, 2025

While focusing mainly on making most 2017 tax reform changes permanent, the One Big Beautiful Bill Act (OBBBA) delivered one significant victory and substantial law change for construction contractors who engage in residential building construction. If certain requirements are met, a construction contractor can take advantage of significant deferral of income as explained below.

Prior Treatment Of Home Building vs. Residential Contracts

Under prior law, a home construction contract (defined as a contract to build a building with four or fewer dwelling units and for which 80% of the estimated cost would be attributable to the dwelling unit) would be eligible to use the completed contract method. However, other residential construction contracts (i.e., multi-family apartment complexes, condo buildings, long-term care facilities, to name a few) were required to use the percentage of completion (PCM) or percentage of completion capitalized cost method (PCCM).

Law Change Under The OBBBA

The new law modifies the exception to using PCM (and therefore the ability to use the completed contract method) to residential contracts. Under the new law, a contractor of any revenue size who has a residential construction contract can utilize the completed contract method for those contracts. This exception is in addition to “small contractors” (those with average gross receipts of $31 million or less in the three preceding tax years [for 2025] and who expect the contract to be completed in three years) who may utilize the completed contract method of accounting for long-term contracts. Note also that under prior law, a construction contract would have had to have been expected to be completed in two years, while the OBBBA modified this to three.

Residential Construction Contracts & Who Can Benefit

A residential construction contract is any one in which 80% of the total estimated costs are attributable to qualifying residential construction projects. A residential construction project can include, but is not limited to, condominium buildings, apartment complexes, long-term care facilities, senior living facilities, prisons, student housing, and mixed-use developments. Not only is this exception available to general contractors, but it can also be available to specialty trade subcontractors performing work on residential building projects.

So, What Are The Benefits?

By utilizing the completed contract method, contractors will be able to defer income until substantial completion of a project, thus saving tax cash flow. In addition, tax compliance can become simpler by not having to maintain multiple work-in-progress schedules for different methods of accounting.

The Fine Print

Although welcomed news, there are a few caveats:

The law change is only treated on a prospective basis for contracts entered into taxable years beginning on or after July 4, 2025 (i.e., 2026 for calendar year taxpayers).
Alternative Minimum Tax still requires long-term contracts to be accounted for under PCM. This could result in AMT liabilities for owners. Note that a construction contractor taxed as a C Corporation is not subject to AMT.
Considerations will need to be made for how to account for the change in accounting method on the contracts.

To see other updates impacting the construction industry from the OBBBA, see our guidance here. Contact Ryan Kilpatrick or Emma Giroux to find out more about this law change.

By Ryan Kilpatrick, CPA, CCIFP, Tax and Business Advisory Services