The 2025 tax reform, enacted through P.L. 119-21, widely known as Republicans’ “One Big Beautiful Bill Act,” introduces significant changes to the rules governing percentage-of-completion method (PCM) accounting. These changes affect how construction and real estate firms recognize revenue, particularly for residential projects. By redefining key terms and eliminating certain exceptions, the legislation reshapes the tax landscape for contractors and developers.
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Key Changes to PCM Accounting Under the 2025 Tax Reform
|
Provision |
Pre-Reform (TCJA) |
Post-Reform (2025 Tax Law) |
|
PCM Exception Definition |
“Home construction contract” under IRC Section 460(e)(1)(A) | Redefined as “residential construction contract” under IRC Section 460(e)(1)(A) |
|
Special Rule for Residential Construction Contracts |
Allowed under IRC Section 460(e)(4) | Eliminated |
|
Alternative Minimum Tax (AMT) Exception |
Based on “home construction contract” under IRC Section 56(a)(3) | Updated to “residential construction contract” under IRC Section 56(a)(3) |
|
Effective Date |
N/A | Applies to contracts entered into in taxable years beginning after enactment |
Redefining the PCM Exception: From Home to Residential Construction Contracts
One of the most notable changes is the redefinition of the exception to percentage-of-completion accounting. Previously, the exception applied to “home construction contracts,” which allowed many residential builders to avoid PCM and instead use more favorable methods like completed contract, which allows the deferral of income until the project is complete, saving cash flow until later in the project life.
A home construction contract is defined as the construction of dwelling units containing four or fewer units. Under the new law, the exception now applies to “residential construction contracts,” a broader category that includes multifamily housing such as apartments and condominiums. This change expands the pool of projects eligible for PCM relief, offering more flexibility to developers and contractors working on non-single-family residential projects.
Elimination of the Special Rule for Residential Construction Contracts
The reform also eliminates the special rule under IRC Section 460(e)(4), which previously allowed certain residential construction contracts to use methods other than PCM even if they didn’t meet the general exception criteria.
This historically allowed taxpayers to elect to use percentage of completion-capitalized cost method (PCCM), where 70% of a contract is accounted for under PCM, and the remaining 30% under the taxpayer’s normal accounting method. This removal narrows the flexibility available to contractors and may require a shift in accounting practices for firms that previously relied on this provision.
Alternative Minimum Tax (AMT) Exception Updated to Match Residential Construction Contract Definition
In addition to changes under IRC Section 460, the legislation aligns the AMT exception with the new “residential construction contract” definition. This ensures consistency across tax regimes and simplifies compliance, but it also means that firms must reassess their AMT exposure under the new framework.
Effective Date: When the New PCM Rules Apply
These changes apply to contracts entered into in taxable years beginning after the date of enactment of the legislation. Firms should begin reviewing their contract pipelines now to determine which projects may be affected and whether current accounting methods remain viable.
Strategic Implications for Construction and Real Estate Firms
The shift from home to residential construction contracts is a welcome expansion for many developers, particularly those in the multifamily space. However, the elimination of the special rule under Internal Revenue Code (IRC) Section 460(e)(4) may limit flexibility for larger or phased projects.
Key actions for industry stakeholders include:
- Contract Review: Evaluate all new and pending contracts to determine eligibility under the revised PCM rules.
- Methodology Assessment: Reassess the use of completed contract or accrual methods in light of the new limitations.
- AMT Planning: Recalculate AMT exposure based on the updated definition of residential construction contracts.
Conclusion: Preparing for the Future of Construction Revenue Recognition
P.L. 119-21 marks a significant shift in how construction and real estate firms must approach revenue recognition. While the broader definition of residential construction contracts offers new opportunities, the added constraints and eliminated exceptions require careful planning and documentation.
Connect with a Cherry Bekaert advisor to evaluate how these changes affect your accounting methods, project timelines or tax exposure. Our construction and real estate tax professionals will help you navigate the new PCM framework and enhance compliance while optimizing your tax position.
Upcoming Webinars
Please join Cherry Bekaert for our webinar series, Tax Horizons: Planning Ahead After the Reconciliation Bill, where we will explore the reconciliation bill in more detail and bring you insights that will help you adjust to changes in the tax landscape.
Sessions:
- August 13: Your Financial Legacy: Key Individual and Estate Tax Shifts
- August 27: Business Tax in Motion: Corporate and PTE Developments
- September. 10: New Global Playbook: International Game Changers
- September 24: From Capitol to County: State & Local Tax in Focus
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