How will the One Big Beautiful Bill (OBBB) impact Residential Construction Contracts?
The OBBB made two significant and favorable changes to the income tax rules related to residential construction contracts entered into in tax years beginning after July 4, 2025.
First Income Tax Reporting Change
The OBBB expands the exception to the percentage-of-completion method of accounting to include residential construction contracts. For tax purposes. Residential construction contracts are defined differently from home construction contracts; the primary difference is the number of dwelling units in the building. (In general, home contracts contain four or fewer units, and residential contracts contain more than four dwelling units.)
The Internal Revenue Code has always provided favorable tax treatment to home construction contracts. One of the most favorable benefits was that the requirement to use the percentage-of-completion method of accounting does not apply to home construction contracts. A home construction contract is defined as any construction contracts where 80% or more of the total estimated contract costs, as of the close of the tax year in which the contract was entered into, are reasonably expected to be attributable to the building, construction, reconstruction or rehabilitation of (1) dwelling units contained in buildings containing four or fewer dwelling units (with each townhouse or rowhouse treated as a separate building), and (2) improvements to real property directly related to such dwelling units and located on the site of such dwelling units.
Residential construction contracts are contracts, other than home construction contracts, for which 80% or more of the total estimated costs under the contract are reasonably expected to be attributable to the building, construction, reconstruction or rehabilitation of, or improvements to, real estate directly related to and located on the site of dwelling units. A dwelling unit, for purposes of this exception, is a house or apartment used to provide living accommodations in a building or structure, but does not include a hotel, motel, inn or other establishment where more than one-half of the units are used on a transient basis.
Second Income Tax Reporting Change
The second material change that the OBBB made to residential construction contracts is that an alternative minimum tax (AMT) adjustment is no longer required for any residential construction contracts entered into in a tax year after July 4, 2025. The elimination of the AMT adjustment further aligns the tax treatment of residential and home construction contacts because home construction contracts have long benefited from the fact that an AMT adjustment was not required on home construction contracts.
This article is part of our ongoing series on the potential impact of the One Big Beautiful Bill. You may view our full library on our OBBB Resource Center.
For more information on the impact of the OBBB on your company, please contact us at [email protected].
About Schneider Downs Construction Services
Led by a diverse group of shareholders and managers, Schneider Downs provides strategic and practical solutions for our construction clients in all facets of their business. Our dedicated team of more than 350 professionals have a wide background of tax, accounting, technological and business experience in the region, specifically in Pittsburgh and Columbus.
To learn more, visit our Construction Industry Group page.
