Do You Still Have to Use Percentage of Completion on Residential Construction Contracts?

TL;DR: If you build residential property with more than four units to a building, and you signed the contract in a tax year that began after July 4, 2025, you are no longer required to report that job on the percentage of completion method. Congress made that change in the One Big Beautiful Bill Act. The IRS just published how you file to switch, in Rev. Proc. 2026-32, which appeared in Internal Revenue Bulletin 2026-39 on September 21, 2026. Two automatic change numbers cover it, 236 and 275. The Form 3115 is a short one, there is no catch-up adjustment, and the switch only reaches contracts you sign on or after the first day of your year of change. Your older jobs stay exactly where they are. The part nobody is talking about is section 263A, which can pull back a chunk of what leaving percentage of completion gives you.

Key takeaways

• Percentage of completion is now optional, not mandatory, for residential construction contracts entered into in tax years beginning after July 4, 2025.
• The 70/30 percentage of completion/capitalized cost method is gone for those contracts. Congress repealed the provision that allowed it.
• Two automatic accounting method change numbers: 275 for moving off percentage of completion or for starting section 263A capitalization, 236 for stopping section 263A capitalization.
• The change is made on a cut-off basis. In the words of the revenue procedure, "a § 481(a) adjustment is neither permitted nor required."
• Only six items of Form 3115 (Rev. December 2022) have to be completed.
• If this is the first tax year you have entered into this type of contract, you are adopting a method rather than changing one, and you do not file a Form 3115 at all.
• Five separate clocks run through this guidance, and the earliest action deadline is October 21, 2026.

What Congress actually changed

Section 460(a) has forced builders onto percentage of completion for any job that crosses a tax year end. You report income on a percentage of a building you have not finished, based on how much of the estimated cost you have run through. Cash has not shown up. Tax has.

Section 460(e) carved out exceptions to that. Before the OBBBA, the exception that mattered was for home construction contracts. The definition, now sitting at section 460(e)(4)(A), asks whether 80 percent of the estimated total contract costs, measured as of the close of the tax year the contract was signed, are reasonably expected to go toward dwelling units in buildings containing four or fewer units, plus improvements to real property that are directly related to those units and located on the site.

Four units. That was the wall. A fiveplex sat on the wrong side of it. So did every garden apartment community and every mid-rise in the country.

Contracts that would qualify except for the unit count have a name of their own, residential construction contracts, and before the OBBBA they got a consolation prize. Old section 460(e)(4) let you use the percentage of completion/capitalized cost method, which ran percentage of completion on 70 percent of the contract income and costs and an exempt method on the other 30. Better than nothing. Not the same as the exception.

OBBBA section 70430(a)(1)(A) moved the wall. The exception at section 460(e)(1)(A) now reaches all residential construction contracts, not only the four-and-under ones. Section 70430(a)(2) struck section 460(e)(4) out of the Code, which takes the 70/30 method away along with it. Section 70430(c) makes both effective for contracts entered into in tax years beginning after July 4, 2025.

What did not move is the definitions. The IRS says so plainly at section 2.03(2) of the revenue procedure: "The OBBBA did not modify the definitions of home construction contract or residential construction contract under § 460(e)." The words mean what they meant. All that changed is which side of the line residential lands on.

Which of your contracts qualify

Three things have to line up.

It has to be a construction contract. Section 460(e)(3) defines that as a contract for the building, construction, reconstruction, or rehabilitation of real property, or for the installation of an integral component to real property, or for improvements to it. Rehab work counts. So does a contract to install an integral component.

It has to be a long-term contract, which under section 460(f)(1) just means it is not completed in the same tax year it was entered into. A job you start and finish inside one year was never in this system to begin with.

And it has to clear the 80 percent test, without the four-unit cap. Eighty percent of estimated total contract costs, as of the close of the year you signed, reasonably expected to go to dwelling units and their on-site related improvements. A 200-unit apartment building qualifies. A mixed-use project with ground-floor retail is a real question, and the answer turns on where the costs land, not on how the project is marketed.

[Flag for verification: section 19.03(1) of the revenue procedure defines residential construction contracts by cross-reference to "§ 460(e)(4)(B)," which is the paragraph OBBBA section 70430(a)(2) struck from the Code. The definition it points at is the one everybody understands, and section 2.03(2) confirms the definitions were not changed, so the meaning is not in doubt. The citation appears to be to a paragraph that no longer exists. Worth a look before anyone quotes the cite in a memo.]

Do you have to leave percentage of completion?

No. This is the part that gets garbled in the trade press, and it matters.

Section 460(e) is an exception to a requirement. It gives you permission to use something else. It does not order you off percentage of completion. And the list of permissible exempt contract methods under section 1.460-4(c) includes the percentage of completion method itself. So a builder who likes matching income to progress, or who has bonding covenants or lender reporting built around it, can keep doing exactly what it has been doing and file nothing.

The alternative that gets the attention is the completed contract method at section 1.460-4(d), which holds income until the job is done. On a three-year build that is a real deferral. It also stacks three years of profit into one tax year at the end, which can push you into a higher bracket, foul up a section 199A calculation, or collide with a year you were already planning around. I have watched people chase the deferral and forget the landing. Run the multi-year projection before you file anything.

The section 263A half runs the other way

Here is the cost of leaving.

Under section 460(e)(1) as the OBBBA amended it, a residential construction contract that is not accounted for under percentage of completion has to have costs capitalized under section 263A, unless you clear a two-part test: you estimated at the time the contract was entered into that it would be completed within the 2-year period beginning on the contract commencement date, with a 3-year period for residential construction contracts that are not home construction contracts, and you met the gross receipts test of section 448(c) for the tax year the contract was entered into.

That gross receipts number is $32,000,000 in average annual gross receipts over the three prior tax years, for tax years beginning in 2026. It was $31,000,000 for tax years beginning in 2025. The 2026 figure comes from section 3.30 of Rev. Proc. 2025-32, at page 695 of Internal Revenue Bulletin 2025-45. If you are on a fiscal year, check which figure your year uses before you rely on either one.

Now look at who that test actually covers. A 200-unit apartment project does not get built in three years very often. A builder doing that kind of volume is rarely under $32 million in gross receipts. So a lot of the people who just walked out from under percentage of completion walk directly into section 263A capitalization on the same contracts.

That is exactly why there are two change numbers instead of one, and why one of them, 275, contains a subsection whose entire purpose is to let you start capitalizing. The IRS built a door in each direction because the statute pushes different taxpayers through different ones.

[Flag for verification: the background discussion at section 2.03(2) describes the section 263A carve-out as applying where the taxpayer estimates the contract "will not be completed" within the 2-year or 3-year period. That reads backward against the pre-OBBBA rule it is describing an amendment to, and against the two operative sections, 19.01(1)(c) and 19.03(1)(b), which both key off whether the contract meets the requirements of section 460(e)(1)(B)(i) and (ii). The operative sections are what a Form 3115 gets filed under, and I have written this section to match them: short contracts by smaller taxpayers escape section 263A, everyone else capitalizes. A tax professional should read the amended statutory text directly before signing a return on this.]

How you actually make the change

Rev. Proc. 2026-32 modifies two sections of the List of Automatic Changes in Rev. Proc. 2025-23.

Change number 275 is new section 19.03. It covers residential construction contracts entered into in tax years beginning after July 4, 2025, and it does two jobs. It moves you from the percentage of completion method under section 1.460-4(b), or from the 70/30 percentage of completion/capitalized cost method under section 1.460-4(e), to an exempt contract method under section 1.460-4(c). And separately, it lets you start capitalizing costs under section 263A for contracts that do not meet the requirements of section 460(e)(1)(B)(i) and (ii).

Change number 236 is the modified section 19.01. The new subsection (1)(c) added by this revenue procedure lets you stop capitalizing costs under section 263A for residential construction contracts entered into in tax years beginning after July 4, 2025 that do meet those requirements. Same change number that already covered the small taxpayer exceptions, with residential folded in.

Both are made on a cut-off basis. The revenue procedure says it in one sentence: "a § 481(a) adjustment is neither permitted nor required." No catch-up, no spread, nothing recomputed for prior years. The new method applies only to contracts entered into on or after the first day of your year of change. Everything you signed before that keeps running on the old method until it closes out. If you were braced for a big positive adjustment, there is not one here.

The filing is light. On Form 3115 (Rev. December 2022) you complete only the identification section of page 1 above Part I, the signature section at the bottom of page 1, Part I, Part II with every line except line 16, Part IV line 25, and Schedule D Part I. That is the whole list for both changes.

The eligibility rules at section 5.01(1)(d) and (f) of Rev. Proc. 2015-13, which normally block you if you have made a change for the same item recently or if you are in your final year of a trade or business, do not apply. For change 275 the waiver covers all of section 19.03 for your first or second tax year beginning after July 4, 2025. For change 236 it covers the new residential subsection over the same window.

The trap in your first year

Before you file anything, ask whether you have a change at all.

Both sections carry the same limit. The change does not apply in the first tax year you enter into a particular type of contract for which you may adopt a permissible method. Section 19.03(2) spells it out with a residential construction contract as the example. When you are adopting a permissible method for the first time, that is not a change in method of accounting under section 446(e) and section 1.446-1(e)(2), and the IRS has held that position since Rev. Rul. 92-28.

So a builder whose first residential construction contract falls in a tax year beginning after July 4, 2025 files no Form 3115 and simply adopts the method on the return. Filing anyway is not a disaster, but it is a fee, a form, and a five-year eligibility clock started for no reason.

Whether a given contract is a "particular type" you have entered into before is a facts question. If you have been doing fourplexes and this is your first 90-unit project, that is worth a real conversation with your preparer rather than an assumption in either direction.

Five clocks, and which one is closest

The date getting quoted around this guidance is September 21, 2026, which is when it hit the bulletin. That is a status date, not an action deadline. Here is the full set.

• September 4, 2026. The modified sections 7, 19.01, and 19.03 are effective for a Form 3115 filed after this date. Anything you file now is under the new version.
• September 21, 2026. Two things keyed to this date, and both are protective. If you already filed a return for a tax year beginning after July 4, 2025 and properly applied one of these methods on it, section 19.03(5) deems you to have complied with the procedures. You are not late, and you do not go back. Separately, a Form 3115 you filed under the non-automatic procedures and that was still pending with the national office on this date can be converted to the automatic procedures.
• October 21, 2026. The first real deadline. If you are converting that pending non-automatic Form 3115, you have to notify the national office of your intent by the later of this date or the date a letter ruling granting or denying consent is issued. Convert successfully and the national office returns your user fee.
• November 15, 2026. If you properly filed the duplicate copy of a Form 3115 on or before this date under the older version of section 7 or 19.01, that filing is grandfathered out of the September 4 effective date. If you have not yet filed your original return for the year of change, you get to pick which version to implement under, old or new, but not both. Choosing the new version means resubmitting a signed duplicate copy to Ogden with this exact statement across the top of page 1: "FILED UNDER REV. PROC. 2026-32, AS PROVIDED IN SECTION 6.02(2)(b) OF REV. PROC. 2026-32".
• Thirty days after the acknowledgment letter. If you convert a non-automatic filing, you then have to resubmit a conforming Form 3115 by the earlier of the 30th calendar day after the date of the national office letter acknowledging your request, or the date your duplicate copy is due under section 6.03(1)(a)(i)(B) of Rev. Proc. 2015-13. This one is not a fixed date on the calendar. It starts when a letter shows up in your mail.

One piece of quiet relief sits at section 6.03(4). A non-automatic Form 3115 filed before September 21, 2026 for one of these changes gets disregarded for the prior five-year change rules at sections 5.04 and 5.05 of Rev. Proc. 2015-13, if you convert it. That keeps an attempt to do the right thing early from blocking you later.

The research expense half of the same document

Rev. Proc. 2026-32 does double duty. Its other half reopens the accounting method changes for research and experimental expenditures, which matters to a different reader entirely but rides in the same document.

The headline for most people is timing relief. The eligibility rules at section 5.01(1)(d) and (f) of Rev. Proc. 2015-13 are now waived for the domestic research changes under section 7.01, the section 174A changes and transition options under section 7.02(3), and the foreign research changes under section 7.03, for any tax year beginning before January 1, 2028. That is a wide runway. The revenue procedure also removed the limitation that had confined the foreign research and experimental expenditure change to tax years beginning before January 1, 2026, so that change is available going forward instead of expiring.

There is one mechanical rule buried in section 3.01 that will catch people. If you make both a change under section 7.01 and a change to the recovery of unamortized amount method under section 7.02(2)(f) for your first tax year beginning after December 31, 2024, any net positive section 481(a) adjustment from the 7.01 change takes the same period you elected for the recovery of unamortized amount method, either all in that first year or ratably over two years. If you made the 7.02(2)(f) change in an earlier year, the net positive adjustment runs over whatever amortization period is left. The point is that this rule only bites when a recovery of unamortized amount method change is in the picture. It is not a general rule about every section 7.01 change.

What this revenue procedure does not do is reopen the small business retroactive election. Under OBBBA section 70302(f)(1)(D) and the procedures in Rev. Proc. 2025-28, eligible small businesses had until the earlier of their section 6511 refund claim period or July 6, 2026 to elect to apply the new domestic research treatment back to tax years 2022 through 2024. That door is shut, and some taxpayers had an even earlier date because section 6511 still governs. Nothing in Rev. Proc. 2026-32 changes it. If you were counting on amending back to pick up those deductions, the method change going forward is what you have left. And if you are working through the credit side of research spending, the section 280C election is the other lever in that same conversation.

Frequently asked questions

Do I still have to use percentage of completion on residential construction contracts?

Not if the contract was entered into in a tax year beginning after July 4, 2025. OBBBA section 70430(a)(1)(A) extended the section 460(e)(1)(A) exception to all residential construction contracts. Percentage of completion became optional for those contracts rather than required. It is still a permissible method under section 1.460-4(c), so you can also keep using it and file nothing.

What happened to the 70/30 percentage of completion/capitalized cost method?

It is gone for contracts entered into in tax years beginning after July 4, 2025. OBBBA section 70430(a)(2) struck section 460(e)(4) from the Code, and that was the provision that allowed residential construction contracts to run percentage of completion on 70 percent of contract income and costs and an exempt method on the other 30 percent.

Which automatic change number do I use?

Change number 275, under new section 19.03 of Rev. Proc. 2025-23, covers moving off percentage of completion or off the 70/30 method to an exempt contract method, and also covers starting section 263A capitalization for contracts that do not meet section 460(e)(1)(B)(i) and (ii). Change number 236, under the modified section 19.01, covers stopping section 263A capitalization for residential construction contracts that do meet those requirements.

Will I have a section 481(a) catch-up adjustment?

No. Both changes are made on a cut-off basis, and the revenue procedure states that a section 481(a) adjustment is neither permitted nor required. The new method applies only to contracts entered into on or after the first day of your year of change. Contracts signed before that date stay on the old method until they close out.

What if this is the first year I have had a contract like this?

Then you probably do not file a Form 3115. Both section 19.01(2) and section 19.03(2) say the change does not apply in the first tax year you enter into a particular type of contract for which you may adopt a permissible method. Adopting a permissible method for the first time is not a change in method of accounting under section 446(e), which the IRS has held since Rev. Rul. 92-28. Whether your new project counts as a type you have entered into before is a facts question worth asking your preparer.

Which date should I actually put on my calendar?

October 21, 2026, if you have a Form 3115 sitting with the national office under the non-automatic procedures and you want to convert it. That is the first genuine action deadline in the guidance. November 15, 2026 matters if you already filed a duplicate copy under the older version of section 7 or 19.01. September 21, 2026 is a status date, not something you have to do anything about.

Where this leaves you

If you build residential and your buildings are bigger than a fourplex, three questions are now live. Whether an exempt contract method beats percentage of completion for the way your business actually runs, which is a projection question and not a preference. Whether section 263A is going to take back part of what you gained. And whether you have a change to file at all, or a method to adopt.

None of those has a general answer. They depend on your contract lengths, your gross receipts, your fiscal year, and what your lenders and bonding company expect to see. That is a conversation with your CPA, and it is worth having before your next return rather than after.

Separately, and this is where I can be useful: when those buildings get placed in service, cost segregation is the study that decides how fast the depreciation comes back to you. I offer a no-cost analysis through my relationship with CSSI. No obligation, no pitch, and no homework beforehand. You do not need to pull documents together before we talk. If the numbers say a study will not pay for itself on your property, I will tell you that, because sending you into a study that does not earn its fee helps neither of us.

Book a time at calendly.com/david-wiener/cs, or call 770-224-8504 and choose option two.

Sources

• Rev. Proc. 2026-32, 2026-39 I.R.B. irs.gov/pub/irs-drop/rp-26-32.pdf
• Rev. Proc. 2025-23, List of Automatic Changes, 2025-24 I.R.B. 1476. irs.gov/pub/irs-drop/rp-25-23.pdf
• Rev. Proc. 2025-28, 2025-38 I.R.B. 393. irs.gov/pub/irs-drop/rp-25-28.pdf
• Rev. Proc. 2015-13, automatic change framework, including the eligibility rules at sections 5.01(1)(d) and (f).
• Rev. Proc. 2025-32, inflation adjustments, section 3.30, gross receipts test amount under section 448(c) for tax years beginning in 2026. 2025-45 I.R.B. 695.
• Rev. Rul. 92-28, adopting a permissible method is not a change in method of accounting.
• One Big Beautiful Bill Act, P.L. 119-21, sections 70302 and 70430.
• Internal Revenue Code sections 263A, 446(e), 448(c), 460, and 481(a), and Treas. Reg. sections 1.446-1(e) and 1.460-4.

This article is educational and is not tax advice. Your situation needs a professional who can look at your actual returns.