Home Construction, Cash Basis, switch to Completed Contract?

Hi All -

I have have been focusing more on outsourced accounting services, so I haven't had a lot of tax questions lately...but here's one that is baking my noodle.

I have a client whose tax preparer has been using a strictly cash basis for prior year returns (s-corp). And by strictly cash, I mean essentially netting the cash change as profits (with the normal exceptions of any company) and no treatment of uncompleted contracts at year end as related assets and liabilities. (i.e. a retainage received just prior to year and would increase taxable profit by the same amount)

This has worked just fine in prior years, but this year it looks like it will create a significant tax liability for the s/h's.

In researching how this could be treated, I came across the Completed Contract Method (https://www.law.cornell.edu/cfr/text/26/1.460-5).

It seems they would qualify as they are a homebuilder with well under the $25MM threshold.

I also found this thread (viewtopic.php?f=8&t=13726&p=123939&hilit=construction+method#p123939), which elucidated that it's not cash to accrual or anything similar, but simply the method to account for long term contracts.

My question is this: Am I correct in assuming that to use the CCM would necessitate a change in accounting method - specifically the method for treatment for long-term contracts? And if so, does anyone have any insight as to under what DCN (form 3115) would this be? All of the ones that I can find, specify either being an accrual taxpayer or changing from the PoC method

You guys are the best. Thank you all. I hope the 2020 season is BOOMING!

BUMP. We have a very similar situation for small long time general contractor who has always been Cash Basis. In 2022, they received a large payment on a long term contract in late December 2022, which is skewing their tax liability. Unfortunately they did not escrow or deposit the payment in a separate account and used some of the cash to pay existing bills. We are looking at whether they could change from Cash Basis to Completed Contract Method for long term contracts in 2022, and if yes, how to do so. (They have had many long term contracts in the past that were handled under cash basis, so this would be a change.) The Form 3115 doesn't seem to have an automatic change procedure for Cash to CCM. Thanks in advance for any help.

Pretty sure any change has to be on a timely filed return, including extensions. That would leave 2022 out, unless you are on a fiscal year.

Ideally Coddington will chime in. He is the resident expert on these matters.

Thanks, Taxcpa. This is for a single-member LLC reporting on Schedule C, so we are still within the extension deadline.

I found this statement within an IRS LB&I Concept Unit, Book 213, Chapter 1:
"Any taxpayer who wishes to change to or from the CCM must file an application for a change in accounting method (Form 3115) using the voluntary method change consent procedures in Rev. Proc. 2015-13. The regulations also state that any voluntary long-term contract change in accounting method must be made on a cut-off basis rather than using an IRC 481(a) adjustment. Accordingly, any voluntary method change under IRC 460 will be applied to contracts entered into on or after the first day of the year of change."
I still have NOT been able to figure out whether this is an automatic change, and if so, what DCN it falls under. The closest I have found is that described in Section 19.01 (RP-2022-14) that discusses changing FROM percentage-of-completion to another exempt contract method of accounting. However, our client has never used PoC. The DCN for this is "236".

https://www.irs.gov/pub/irs-pdf/p5522.pdf
Audit technique guide for construction

Thanks!

Last time we did this change was in 2008. It was not an automatic change. Client paid a $3,800 user fee

Thanks, Wiles. That's what I suspect. The fees have gone up a lot since then, I think it is around $10k now.