If you run a construction business, you’ve probably heard of the percentage-of-completion method, but do you really know how it impacts your taxes? Many contractors use this accounting method because it reflects how revenue is earned on long-term projects. But here’s the catch, the IRS keeps a close eye on how you report income using it.

At Tavola Group, we specialize in proactive tax planning for construction companies, and we often help clients navigate the tricky waters of construction accounting. In this article, we’ll break down what percentage-of-completion accounting is, how it affects your taxes, and how to stay compliant while minimizing your tax burden.

 

What Is Percentage-of-Completion Accounting?

Let’s start with the basics. The percentage-of-completion (POC) method is used to recognize revenue and expenses on long-term projects as the work is performed rather than when the project is fully completed.

So instead of waiting until the end of a job to report income, you report a portion of your revenue and expenses each year (or even each quarter) based on how much of the project is complete.

This method gives a more accurate picture of a company’s financial performance, especially when contracts span multiple tax years. However, it also requires detailed job tracking and regular updates to your books. And that’s where things can get a bit complicated for tax purposes.

 

Why the IRS Requires It for Most Contractors

Here’s something many business owners don’t realize, the IRS requires most construction contractors with projects lasting over one year to use the percentage-of-completion (POC) method for tax reporting. Specifically, if your average annual gross receipts exceed $27 million, based on 2025 inflation-adjusted thresholds, and you’re working on long-term contracts that span more than a year, you’re generally required to use POC for tax purposes. This means you’ll be recognizing income and paying taxes before you’ve actually received full payment from your client. And yes, this can create serious cash flow challenges if you’re not planning ahead.

 

How Percentage-of-Completion Impacts Your Tax Liability

The biggest thing to understand about percentage-of-completion accounting and taxes is that it accelerates taxable income.

Let’s say your company lands a $1 million project that will take two years to complete. By the end of year one, you’ve completed 60% of the job. Under the POC method, you’re required to report 60% of that $1 million, $600,000 in revenue, on your current year’s tax return, even if you haven’t collected the full amount yet.

That means you’ll owe taxes on income you may not have in the bank yet. It’s one of the most common tax pain points we see for contractors, and one of the top reasons proactive planning is essential.

 

The Role of Cost Estimation in Tax Calculations

Since revenue is recognized based on project progress, accurate cost estimation is critical when using the percentage-of-completion (POC) method. If your cost-to-complete projections are inaccurate, you could end up recognizing too much or too little income too early, which can distort your finances and trigger IRS scrutiny. The IRS expects you to calculate revenue earned using a specific formula, divide costs incurred to date by the estimated total project costs to determine the percentage completed. That percentage is then applied to the total contract value to calculate how much revenue should be recognized in the current period. If your estimates aren’t updated regularly, or if they’re significantly off, you risk noncompliance and potential audit issues.

 

Common Tax Challenges Construction Businesses Face with POC

Construction business owners who use percentage-of-completion accounting often face a few specific tax challenges:

1. Mismatch Between Taxable Income and Cash Flow

As mentioned earlier, you may owe taxes on work you haven’t been paid for yet. This mismatch can lead to unexpected tax bills and even penalties.

2. Overstatement of Profits

Aggressive revenue recognition can make your business look more profitable than it really is. That may not only increase your tax liability but also skew how lenders or partners evaluate your financials.

3. Audit Risk

Because POC relies heavily on estimates, the IRS may view it as more prone to error. If your reported income doesn’t align with job schedules, invoices, and costs, it can be a red flag.

4. Complex Bookkeeping Requirements

To stay compliant, you need detailed records of job costs, billing, and project status, something many contractors struggle to maintain consistently.

 

Alternatives for Smaller Construction Businesses

If your construction business earns less than $27 million in gross receipts, you may qualify for alternative accounting methods. These include the completed contract method (CCM) or cash basis accounting.

Both options allow you to defer income recognition, either until the project is finished or payment is received. This can reduce your taxable income in the short term.

At Tavola Group, we help clients determine if they qualify and whether switching could lower their overall tax burden. The right accounting method can make a big difference to your bottom line.

 

Proactive Tax Planning Is Key with Percentage-of-Completion

The reality is, percentage-of-completion accounting doesn’t have to be a tax nightmare if you plan ahead. With the right strategy in place, you can accurately forecast tax liability based on project progress, manage cash flow to meet tax deadlines, and maintain audit-ready records for each job. It’s also worth evaluating whether alternative accounting methods may be available, depending on your qualifications.

In addition, there are often overlooked tax-saving opportunities tied to equipment deductions, business structure, and more. Working closely with project managers and bookkeepers to ensure job costing aligns with tax reporting is another key step for both compliance and financial stability.

 

POC Can Work For You, Not Against You

The percentage-of-completion method can be complex—but when used strategically and paired with proactive tax planning, it becomes a powerful tool for managing compliance, cash flow, and profits.

As the year draws to a close, now is the time to make sure your accounting method is working for your business—not against it. Don’t wait until tax season to find out you could’ve saved more.

Partner with professionals who understand construction accounting and how to leverage POC for year-end results. Tavola Group can help you assess your current setup, evaluate the tax impact of your contracts, and build a strategy that positions you for a stronger 2026.

Book your free year-end tax planning consultation today and take control of your numbers before the clock runs out.

Want even more insight before year-end? Register for our upcoming free webinar, “Year-End Tax Strategies to Maximize Business Savings,” on Thursday, October 30 at 12 PM CT. Tavola Group’s Director of Tax, Danny Torres, CPA, will share actionable steps to reduce your 2025 tax bill, capture last-minute deductions, and approach the new year with clarity and confidence.