The enactment of the One Big Beautiful Bill Act (OBBB) marks one of the most significant changes to the long-term contract accounting rules in decades. Among its many tax provisions, OBBB revised Internal Revenue Code (IRC) Section 460, expanding favorable accounting method treatment for certain residential construction contracts and creating new planning opportunities for contractors, builders, and developers.

For taxpayers operating in the construction and real estate industries, these changes may provide meaningful cash-flow benefits by allowing greater deferral of taxable income. However, the revisions also introduce new considerations regarding contract classification, accounting methods, documentation requirements, and state tax conformity.

This article explains the longstanding distinction between the percentage-of-completion method (PCM) and completed-contract method (CCM), summarizes the changes made by OBBB, and outlines practical steps taxpayers should consider moving forward.

Understanding Section 460

IRC Section 460 governs the federal income tax treatment of certain long-term contracts. Generally, a long-term contract is one that is not completed within the taxable year in which it is entered.. The provision primarily affects taxpayers engaged in construction, engineering, and manufacturing where projects often span multiple tax years. Because these contracts can take years to complete, Section 460 establishes rules that determine when revenue and related costs must be recognized for tax purposes.

For many long-term contracts, taxable income must be recognized using PCM. Under PCM, income is recognized throughout the life of the contract based on the percentage of the project completed during the year. The completion percentage is generally determined by comparing costs incurred to estimated total contract costs.

While PCM accelerates income recognition and provides the government with earlier tax collections, taxpayers have historically sought exceptions that permit use of more favorable accounting methods, including CCM, which generally defers recognition of contract income and expenses until the contract is substantially complete.

Residential construction under prior law

Before OBBB, Section 460 provided particularly favorable treatment for home construction contracts. A home construction contract generally existed when at least 80% of estimated total contract costs were attributable to dwelling units in buildings containing four or fewer units, together with related site improvements. Single-family homes, townhomes, and similar projects often qualified for this exception. Because home construction contracts were exempt from mandatory PCM, taxpayers frequently could utilize CCM or another permissible exempt-contract method.

However, many larger residential projects did not qualify for this treatment.

Multifamily developments, apartment projects, condominium complexes, and similar residential projects often fell outside the home construction contract definition because they involved buildings containing more than four dwelling units. These projects were generally subject to a hybrid regime commonly referred to as the percentage-of-completion capitalized-cost method (PCCM), under which:

• • 70% of the contract was subject to PCM; and
  • 30% could be reported using an exempt-contract method.

As a result, taxpayers engaged in larger residential developments frequently faced earlier income recognition than taxpayers constructing single-family residential projects.

OBBB expands the residential construction exception

OBBB significantly revised Section 460 by expanding the existing exception from home construction contracts to residential construction contracts. This seemingly simple wording change may have substantial implications throughout the construction industry.

Under the revised rules, qualifying residential construction contracts are no longer limited to projects involving buildings containing four or fewer dwelling units. As a result, many projects that previously fell outside the home construction contract exception may now qualify for more favorable treatment.

The legislation also repealed the special statutory PCCM framework that previously applied to many non-home residential projects.

Perhaps most importantly, the legislation eliminates a longstanding mismatch between regular tax and AMT accounting for many residential construction contracts. Qualifying contracts may now generally use CCM for both regular tax and AMT purposes, simplifying compliance and potentially enhancing tax deferral opportunities.

What this means in practice

For taxpayers with long-term construction contracts, the key question is whether a project qualifies as a residential construction contract under the revised rules. If it does, the contract may no longer be subject to mandatory PCM, potentially allowing the use of CCM or another permissible method that defers income recognition until later in the project lifecycle.

As a result, many multifamily and other residential developments that previously received only partial relief under the PCCM rules may now qualify for more favorable tax treatment. However, taxpayers must still analyze each contract carefully to confirm eligibility and ensure the project meets the statutory requirements for residential construction contracts.

Accounting method considerations for first-time residential contractors

One favorable procedural rule that is often overlooked applies to contractors entering the residential construction market for the first time. If a general contractor's first residential construction contract qualifies for an exempt-contract method under Section 460, the contractor may generally adopt that permissible method, including CCM, on a timely filed return for the year of adoption without filing Form 3115.

However, once a taxpayer has established a method of accounting for residential construction contracts, a subsequent change generally requires an accounting method change. In addition, long-term contracts must generally be reported using the same method under which the contract began. As a result, a Form 3115 filing typically affects only contracts entered into after the effective date of the change and will not alter the treatment of contracts already in progress. Because the rules governing long-term contract method changes can be highly technical, taxpayers should carefully evaluate the procedural requirements before changing their reporting approach.

Subsequent to OBBB’s enactment, the IRS issued Rev. Proc. 2026-32, which provides automatic accounting method change procedures for certain taxpayers affected by the expansion of the residential construction contract exception under Section 460. Taxpayers that previously reported qualifying residential projects using PCM or PCCM should evaluate whether a Form 3115 may be advisable to adopt a permissible exempt-contract method for future qualifying contracts. In addition, the revenue procedure includes a favorable transition rule under which taxpayers that filed a federal income tax return on or before Sept. 21, 2026, for a taxable year beginning after July 4, 2025, are generally deemed to have satisfied the accounting method change requirements of Section 446(e) if they properly applied the amended Section 460 rules on that return. Accordingly, taxpayers should review the applicable transition and procedural requirements before implementing any change in reporting method.

Projects that do not qualify must continue to evaluate whether another Section 460 exception, such as the small-contractor exception, is available. As with any accounting method determination, proper documentation and consistent application remain essential.

Permanent bonus depreciation coordination rule

OBBB included another important Section 460-related provision by making permanent the rule that coordinates bonus depreciation with PCM calculations. For taxpayers required to use PCM, the cost of certain qualified property generally must be considered for completion-percentage purposes as though bonus depreciation had not been enacted.

Without this rule, large bonus depreciation deductions could artificially accelerate contract completion percentages and result in earlier income recognition. By making this coordination rule permanent, Congress preserved consistency in PCM calculations while maintaining the availability of accelerated depreciation incentives.

Are the changes favorable for taxpayers?

For many residential builders and developers, the answer is yes. By expanding the exception from home construction contracts to residential construction contracts, OBBB may allow more taxpayers to avoid mandatory PCM and utilize more favorable accounting methods. This could improve cash flow through additional tax deferral, eliminate the former 70/30 PCCM limitation for many projects, and simplify AMT compliance.

That said, the benefits are not automatic. Taxpayers must still carefully evaluate contract classifications, cost allocations, and project characteristics to determine eligibility. In addition, CCM may not always be advantageous, as it can defer losses as well as income and may require changes to existing accounting processes. As a result, taxpayers should analyze the impact of the new rules before modifying their current reporting approach.

State tax considerations

Although OBBB changes federal tax law, state tax treatment may not immediately follow. Many states conform to the Internal Revenue Code on a rolling basis, while others adopt federal changes only after legislative action. Some states selectively decouple from specific federal provisions. As a result, a taxpayer could be permitted to use one accounting method for federal purposes while remaining subject to different treatment at the state level. Contractors operating in multiple jurisdictions should carefully monitor state conformity developments and model the impact of any federal-state differences.

Recommended next steps

Although the changes introduced by OBBB present significant opportunities, taxpayers should not assume the benefits apply automatically. Instead, now is the time to review both existing and anticipated projects to determine whether contracts may qualify under the expanded residential construction contract exception. Particular attention should be given to multifamily and other residential developments that previously did not qualify for treatment as home construction contracts.

As part of that review, taxpayers should evaluate how the new rules affect their overall tax profile. Modeling the impact of PCM versus CCM can help quantify potential tax deferral opportunities, identify cash-flow benefits, and determine whether changes to existing accounting practices may be warranted.

Taxpayers should also ensure they maintain sufficient documentation to support contract classifications, project cost allocations, and eligibility under the revised rules. Because accounting method considerations may arise, businesses should assess whether procedural requirements, disclosures, or method change filings are necessary before implementing a new approach.

Finally, businesses operating in multiple jurisdictions should continue monitoring state conformity developments. While OBBB changes apply for federal income tax purposes, state adoption may vary, potentially creating differences between federal and state taxable income calculations. Working proactively with tax advisors can help taxpayers navigate these complexities and fully capitalize on the planning opportunities created by the new legislation.

Final thoughts

OBBB’s revisions to Section 460 represent one of the most consequential changes to long-term contract accounting in recent years. By expanding the exception from home construction contracts to residential construction contracts, Congress has created new opportunities for residential builders, developers, and contractors to defer income recognition and improve cash flow.

However, the benefits are not automatic. Success will depend on careful contract analysis, accurate cost allocation, thoughtful accounting method planning, and ongoing monitoring of both federal guidance and state conformity developments.

For taxpayers engaged in residential construction activities, now is the time to evaluate existing contract portfolios, assess planning opportunities, and position the business to take full advantage of the new rules. 

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.