Your CPA just told you the completed-contract method is off the table. For years your firm sat under the small-contractor exemption, and how you recognized revenue on a job was somebody else's problem. You booked it when the job closed and moved on. This year your trailing three-year average gross receipts crossed the line, so the IRS now requires the percentage-of-completion method on your long-term contracts, and your bank and bonding agent want the schedule that goes with it. You have never built a WIP schedule. Here is your first one: what triggered the switch, the columns it needs, the single place the tax rule and GAAP diverge, and a first-month checklist to produce schedule number one from job-cost data you already have.
This is a hand-off piece, not a tax treatise. The deep tax mechanics and the GAAP-versus-tax accounting live in the linked guides; the job here is to get you from "we crossed a threshold" to "here is exactly what changes in my monthly rhythm."
What triggers the switch to percentage-of-completion?
A contractor crosses into required percentage-of-completion the first tax year its trailing three-year average gross receipts exceed the §448(c) threshold referenced in IRC §460(e). Below that line, a long-term construction contract expected to finish within two years qualifies for an exempt method: completed-contract, cash, or accrual. Above it, IRC §460 requires the percentage-of-completion method for those contracts (26 U.S.C. §460).
The test is mechanical, and it looks backward, not forward. IRC §460(e)(1)(B) exempts a long-term construction contract from required percentage-of-completion tax accounting when two conditions both hold: the contract is expected to complete within two years, and the contractor meets the §448(c) gross-receipts test, meaning average annual gross receipts for the prior three tax years sit at or below the indexed threshold (26 U.S.C. §460). Home-construction contracts are carved out separately under §460(e). Once your three-year average pushes past the threshold, the exemption is gone even for the short jobs. And the switch is not something you elect; it is required. To be clear about who does what: filing the switch is your CPA's job — moving from completed-contract to percentage-of-completion is a formal accounting-method change on the tax return, and your CPA handles that paperwork. There is no separate form for you to file. Your job is the schedule this post builds.
Note the two-part statutory reference, because most write-ups blur it: IRC §460 sets the exception, and §448(c) supplies the dollar figure that gets re-indexed for inflation each year. The number that moves is the §448(c) amount.
What is the small-contractor exemption threshold for 2026?
For tax year 2026, the IRC §460 small-contractor exception threshold, the average-annual-gross-receipts test under §448(c), is $32,000,000, per IRS Revenue Procedure 2025-32, §4.30 (irs.gov/pub/irs-drop/rp-25-32.pdf). In the Revenue Procedure's own words, a corporation or partnership meets the gross-receipts test if its average annual gross receipts for the prior three-year period do not exceed $32,000,000 (Current Federal Tax Developments, Oct 9 2025).
The figure moves every year. It was $31,000,000 for tax year 2025 (Rev. Proc. 2024-40) and $30,000,000 for 2024, up from the original $25,000,000 the Tax Cuts and Jobs Act of 2017 set when it raised the prior $10M ceiling (macpas.com). Most guides you will find still print the stale $25M or $31M figure; the current, correct number for tax year 2026 is $32M, and it traces to Rev. Proc. 2025-32 §4.30.
One maintenance note: because the amount is inflation-indexed, confirm it against the latest IRS Revenue Procedure each tax year. The 2027 figure will publish around October 2026.
What is a WIP schedule, and why do you need one now?
A WIP (work-in-progress) schedule is a monthly financial document that lists every active construction job and shows, for each one, its contract value, costs incurred to date, percent complete, revenue earned, amount billed, and whether you have billed ahead of or behind the work. It is the report your surety, your bank, and your CPA read every month to judge the true financial status of every job you are running (BMS Books). That single paragraph is the whole definition; for the full column-by-column depth, formulas, and who reads it and why, see what a WIP schedule is.
You need one now because percentage-of-completion recognizes revenue by progress rather than at completion, and the WIP schedule is the worksheet that produces that revenue number. Under the completed-contract world you just left, a job contributed no revenue until it closed. Under percentage-of-completion, every open job earns a slice of its revenue each period based on how far along it is. The schedule is where you compute that slice. Well over 90% of construction companies use percentage-of-completion for exactly this reason (Foundation Software).
What are the minimum columns of your first WIP schedule?
A first WIP schedule needs eight columns. Six of them come straight out of your accounting system; the other two are calculated from a single number the project manager gives you. You do not need the mature 11-column version yet. You need the minimum that produces a defensible earned-revenue figure for each job.
| Column | What it is | Where it comes from |
|---|---|---|
| Job / contract value | Total you will bill for the job, including approved change orders | Contract + change-order log |
| Costs to date | Job costs incurred so far | Job-cost ledger |
| Cost-to-complete (ETC) | The PM's estimate of the cost to finish the remaining work | The project manager (the only subjective input) |
| Estimated cost at completion (EAC) | Costs to date + cost-to-complete | Calculated |
| Percent complete | Costs to date ÷ EAC | Calculated |
| Earned revenue | Percent complete × contract value | Calculated |
| Billed to date | What you have invoiced the owner | Billing / accounts receivable |
| Over/(under) billing | Billed to date − earned revenue (positive = overbilled) | Calculated |
The four calculated columns are the entire method: EAC, then percent complete, then earned revenue, then the over/(under)-billing position. That is the four-step formula chain that builds each column, worked example and all.
A quick illustrative pass (figures illustrative, a fictional $40M contractor called Ridgeline Builders): a $6,000,000 job with $2,400,000 in costs to date and a PM cost-to-complete of $1,600,000 has an EAC of $4,000,000 and is 60% complete ($2,400,000 ÷ $4,000,000). Earned revenue is 60% × $6,000,000 = $3,600,000. If Ridgeline has billed the owner $3,900,000, the over/(under) billing is $3,900,000 − $3,600,000 = $300,000 overbilled — a current liability, not income. That last number is one your CPA and your bank will now ask about by name.
Does the tax rule (IRC §460) match your GAAP percentage-of-completion (ASC 606)?
No — IRC §460 and ASC 606 are separate regimes that can require different treatment at the same time. IRC §460 governs your tax return and is what the $32M gross-receipts threshold just pushed you onto; ASC 606 governs your GAAP financial statements and has its own over-time revenue rules (26 U.S.C. §460). If you are not bonded or bank-financed, you can skip this wrinkle: it probably does not touch you, and it is not something you were quietly supposed to be doing already. If your firm was already bonded or bank-financed, here is the good news, not a new obligation: your reviewed GAAP statements were very likely reporting percentage-of-completion all along, because the surety and the lender required it. What changed this year is the tax method catching up to a GAAP picture you already had, not new accounting work landing on your desk.
Keep the two straight and do not try to make one set of numbers serve both without your CPA's sign-off. For the full mechanics of where the two diverge, read the tax-vs-GAAP wrinkle in percentage-of-completion.
What changes operationally once you're required to use percentage-of-completion?
Three things change the month you switch, and none of them are about arithmetic.
First, close becomes monthly, on a calendar. If your firm never produced a WIP under the exempt method, you may not have run a true monthly job-cost close before. Percentage-of-completion needs a fresh EAC and earned-revenue figure for every open job, every period.
Second, the project manager's cost-to-complete becomes load-bearing. It is the only input on the schedule that does not come straight from the accounting system, and it drives EAC, percent complete, earned revenue, and the billing position all at once (Foundation Software). A cost-to-complete that is late, guessed, or quietly padded moves your reported revenue. So it now needs a name, a date, and a note behind it, not a number chased over email.
Third, over/(under) billing becomes a real balance-sheet line. Overbilled jobs sit as a current liability (billings in excess of costs); underbilled jobs sit as a current asset (costs in excess of billings). Your CPA will book them, and your bank and bonding agent will read them. The billing position they were never handed before is now a monthly deliverable.
Your first month on percentage-of-completion: a checklist
Here is how to build schedule number one from data you already have. A blank spreadsheet is all you need to start — one row per open job, one column per field in the table above. You do not need new software to produce your first schedule. Work it once and the second month is a refresh, not a rebuild.
- List every open contract and its expected completion date. This is your row set: one line per active job.
- Pull costs-to-date per job from the job-cost ledger. This is the objective spine of the schedule; it should tie to your general ledger.
- Get a cost-to-complete from every PM, in writing. Ask it in plain terms ("how much more will it cost to finish this job?") and capture a short note with each number.
- Compute EAC, percent complete, and earned revenue for each job: EAC = costs to date + cost-to-complete; percent complete = costs to date ÷ EAC; earned revenue = percent complete × contract value.
- Compare earned revenue to billings to date on each job to get the over/(under)-billing position.
- Flag any job already materially over- or underbilled. Those are the lines your CPA and bank will question first, so know the story before they ask.
- Calendar the recurring monthly close date now, before the first schedule is even finished. Percentage-of-completion is a cadence, not a one-time event.
Frequently asked questions
What is the small-contractor exemption from percentage-of-completion accounting? The small-contractor exemption is the IRC §460(e) exception that lets a contractor avoid the required percentage-of-completion tax method on long-term construction contracts. It applies when the contract is expected to finish within two years and the contractor passes the §448(c) gross-receipts test — average annual gross receipts for the prior three tax years at or below the inflation-indexed threshold. For tax year 2026 that threshold is $32,000,000 (IRS Rev. Proc. 2025-32, §4.30). Contractors under the line can use completed-contract, cash, or accrual for those contracts; contractors over it must use percentage-of-completion (26 U.S.C. §460).
What is the gross-receipts threshold for the small-contractor exception in 2026? For tax year 2026 it is $32,000,000, per IRS Revenue Procedure 2025-32, §4.30. It was $31,000,000 for 2025 (Rev. Proc. 2024-40) and $30,000,000 for 2024, up from the original $25,000,000 set by the Tax Cuts and Jobs Act of 2017. Most guides you will find still print the stale $25M or $31M figure — the current, correct number for 2026 is $32M.
What happens the year a contractor crosses the $32 million threshold? The first tax year your trailing three-year average gross receipts exceed $32,000,000, the small-contractor exemption is gone: completed-contract and other exempt methods are no longer available for your long-term contracts, and IRC §460 requires the percentage-of-completion method. In practice that means recognizing revenue on each open job by progress instead of at completion — which is what a WIP schedule computes.
What is a WIP schedule and why do I need one now? A WIP schedule is the monthly document that lists every active job and shows its contract value, costs to date, percent complete, earned revenue, billings to date, and over/(under)-billing position — the report your surety, your bank, and your CPA read every month (BMS Books). You need one now because percentage-of-completion recognizes revenue by progress, and the WIP schedule is the worksheet that produces that revenue figure job by job.
What are the minimum columns on a first WIP schedule? Eight: job name/contract value, costs to date, cost-to-complete (ETC), estimated cost at completion (EAC), percent complete, earned revenue, billed to date, and over/(under) billing. Six come straight from your accounting system; EAC, percent complete, earned revenue, and the billing position are calculated; the cost-to-complete is the one number the PM has to give you (Foundation Software).
Is the tax percentage-of-completion method (IRC §460) the same as GAAP percentage-of-completion (ASC 606)? No. IRC §460 governs your tax return; ASC 606 governs your GAAP financial statements. They are separate regimes, and a contractor can be pushed onto tax percentage-of-completion by the §460 gross-receipts threshold while its GAAP statements were already reporting percentage-of-completion for the bank and the surety. See our guide to the tax-vs-GAAP wrinkle in percentage-of-completion for the full mechanics.
How WIP Ready helps
The month you switch to percentage-of-completion is the month the WIP schedule becomes a permanent fixture of your close. The hardest part is not the math. It is getting a real cost-to-complete from every project manager, every period, with a note behind it. A spreadsheet handles your first few closes fine. If your projects run in Procore, WIP Ready is the step up from that spreadsheet: it sits on top of Procore, pulls the objective columns (contract value, costs to date, billings) straight from your project data, and collects each PM's cost-to-complete through a one-screen mobile form — no login, no spreadsheet — so every figure traces to a Procore field or a timestamped submission. It reads from Procore and never writes back; it is a reporting layer, not a new accounting system. If that first WIP close just landed on your desk and your work already lives in Procore, that is the workflow to see: wipready.com.
