CFP

By Investopedia AAA

Tax Accounting - Long-term Contracts

Long-term Contracts
A long-term contract is a contract that is NOT completed in the same year that it was entered into and it contracts for the manufacture, construction, installation or building of property. Examples include construction of a bridge or a highway.


The two most common Long-term Contract accounting methods are:
  • Percentage-of-Completion Method
  • Completed Contract Method

Percentage-of-Completion Method:
Taxpayer has to recognize a portion of the gross profit on the contract, based on an estimate of the contract completed.


Contract Price Reportable = Total Contract Price x [Period Cost/Total Est. Cost]

Most long-term contracts use the Percentage-of-Completion method.

Completed Contract Method:
This method allows the taxpayer to defer the revenue recognized until completion of the contract.

Only allowed in two situations:

  1. Small contractors - two year completion, average annual gross receipts less than $10 million (for the last three years)
  2. Home construction - buildings containing four or less living units, with at least 80% of costs going towards project.
Installment Sales

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