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. 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.
  2. Retirement

    Converting An IRA Annuity To A Roth: Know The Rules

    We look at the past and current legislation that governs IRA annuity conversions.
  3. Investing

    Currency futures: An introduction

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

    Beginner's Guide To Trading Futures

    An in-depth look into what futures are, and how you can build a solid base to begin trading them.
  5. Investing

    Fueling Futures In The Energy Market

    The energy market influences every aspect of our lives, and these four options are its driving force.
  6. 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 ...
  7. Investing

    Is USO a Good Way to Invest in Oil?

    The United States Oil Fund is better suited to short-term investors who actively manage their portfolios.
  8. Trading

    How to Trade Dow Jones Future Contracts

    Learn about the Dow Jones Index futures contracts available and obtain step-by-step instruction on how to trade the stock index futures.
Frequently Asked Questions
  1. What Is a Holistic Marketing Strategy?

    Understand what holistic marketing is, and learn how the components of this strategy work when applied to different business ...
  2. What's the First Stock Warren Buffett Ever Bought?

    Find out about Warren Buffett's first experience in stock market trading. Learn some of the Berkshire Hathaway CEO's basic ...
  3. When Is a Put Option Considered to Be 'in the Money?'

    Learn about put options, how these financial derivatives work and when put options are considered to be in the money related ...
  4. What Are Some of the Top Hostile Takeovers of All-Time?

    Learn about some of the most noteworthy hostile takeovers in history, including the KKR acquisition of RJR Nabisco and the ...
Trading Center