The completed contract method (CCM) is a tax accounting methodology that allows businesses to defer recognizing revenue and expenses from long-term contracts until the contracts are completed. This accounting method is widely used in construction, manufacturing, and other industries where contracts may stretch over several years.
The IRS allows eligible businesses to use the CCM as a way to minimize tax liability by delaying recognition of revenue and expenses until the project or contract is completed. This method is different from the percentage of completion method (PCM), which recognizes revenue and expenses as they are earned or incurred during the life of the contract.
To qualify for the CCM, a contract must meet certain IRS criteria, such as having a completion period of more than two years or being a construction contract. According to the IRS, taxpayers using the CCM must have a reasonable expectation of completing the contract and must apply the method consistently to all contracts of a similar nature.
One significant advantage of the CCM is its ability to potentially reduce taxable income in the early years of a project. This is because expenses incurred during the early stages of a contract can be deferred until the project is complete, allowing for lower taxable income in those years. Additionally, it can simplify tax filings and accounting procedures for businesses with long-term contracts.
However, there are also potential downsides to using the CCM. One major drawback is the requirement to have a reasonable expectation of completing the contract, which can be difficult to predict in certain industries. Additionally, deferring recognition of revenue and expenses until completion can make it harder to manage cash flow and budgeting during the life of the contract.
Overall, the completed contract method can be a useful tool for businesses with long-term contracts, especially those in construction and manufacturing. However, it’s important to carefully consider the potential benefits and drawbacks before choosing this accounting method and to work closely with a qualified tax professional to ensure compliance with IRS regulations.