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

Related Articles
  1. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  2. Financial Advisor

    Divorce and Annuities: What Clients Need to Know

    Divorce can be the most financially devastating event in a person’s life. Here’s what your clients need to know about handling annuities in a divorce case.
  3. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  4. Retirement

    Converting An IRA Annuity To A Roth: Know The Rules

    We look at the past and current legislation that governs IRA annuity conversions.
  5. Managing Wealth

    How Do Futures Contracts Work?

    Futures contracts are one of the most important financial innovations in history, but they are often misunderstood. Find out this contract is used to transfer risk between different parties. ...
  6. Investing

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  7. Trading

    Why Forward Contracts Are The Foundation Of All Derivatives

    This article expands on the complex structure of derivatives by explaining how an investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward ...
  8. Investing

    How to Trade Futures Contracts

    Futures is short for Futures Contracts, which are contracts between a buyer and seller of an asset who agree to exchange goods and money at a future date, but at a price and quantity determined ...
  9. Investing

    How To Calculate Margin On The Series 3 Exam

    Learn what you need to know about margin to pass your Series 3 exam.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center