If you’re a contractor in residential construction, the recently enacted One Big Beautiful Bill (OBBB) brings a significant tax advantage your way.
This legislation revises a key section of the tax code—IRC § 460(e)—which determines which long-term construction contracts are exempt from the burdensome percentage-of-completion (POC) method for income tax purposes.
Let’s review what’s changed and, more importantly, what it means for you.
Old Long-Term Contract Rules Under IRC § 460(e): Limited Relief
Previously, under IRC § 460(e), only “home construction contracts” were exempt from the POC method. However, this term was narrowly defined:
80 percent or more of the estimated total contract costs had to be attributable to dwelling units in buildings with four or fewer units.
Larger residential development, such as apartment complexes, townhome clusters and mixed-use buildings did not qualify.
As a result, many residential contractors were required to use the POC method, forcing them to report income and pay taxes on work they hadn’t yet been paid for.
What Changed: “Home” Becomes “Residential”
The OBBB replaces the term “home construction contracts” with the broader term “residential construction contracts.”
Under this new definition:
The project must involve the construction of residential rental or ownership buildings, regardless of the number of units.
The old 4-unit limit has been eliminated.
This is a game-changer for contractors working on apartment complexes, multifamily developments, senior housing, and dormitories.
Bottom Line: More Projects Qualify for Tax Relief
If you build residential properties—even large-scale developments—you may now qualify for exemption from the POC method. Instead, you can use the more favorable completed contract or cash method for tax purposes.
Longer Timeline = More Flexibility
The legislation also extends the timeline for qualifying construction contracts.
Old Rule: Contracts had to be expected to finish within 2 years to qualify for exemption under IRC § 460(e).
New Rule: Contracts expected to be completed within 3 years now qualify.
This change provides greater flexibility for larger residential projects that previously fell outside the 2-year window.
Why This Matters: Tax Deferral = Better Cash Flow
Here’s how the new rules impact your bottom line:
Method
When You Pay Tax
Impact
Percentage of Completion (POC)
As the job progresses—even before you’re paid
Accelerates taxable income
Completed Contract
Only when the project is completed
Defers tax, improves cash flow
With the OBBB, more contracts now qualify for the completed contract method, allowing contractors to:
Defer income recognition
Better align tax payments with actual cash received
Lower current-year taxable income
What You Should Do Now
To take advantage of these changes, contractors should work with their CPA to:
Review active and upcoming projects to identify those that qualify under the new “residential” definition.
Change tax accounting methods where applicable—this may involve filing Form 3115 with the IRS to request a change in accounting method.
Evaluate income timing to strategically defer taxes and improve cash flow.
Final Thoughts
By broadening the definition of qualifying construction contracts and extending the project duration window, the OBBB offers meaningful benefits to residential contractors. If you’re building anything with a roof and more than four walls, it’s worth a closer look.
Have questions about how this affects your business?
Let’s talk. At Herbein, we specialize in construction tax strategy and are here to help you build a better bottom line.
This blog is for general informational purposes only and does not constitute tax advice. Please consult your CPA for advice specific to your situation.
Article Contributed by Ryan Krall
