A kitchen remodel that starts in November and finishes in February crosses two tax years. Whether you report that income all at once or spread across both years depends on an accounting method election most remodeling contractors have never actually made deliberately.
If you run a home improvement, drywall, window, or glass installation business anywhere in Frederick County or central Maryland, projects that span the calendar year-end are common, and how you account for them has a real effect on your tax bill and your cash flow.
Under the percentage-of-completion method, you report a portion of a project's income and expenses each year based on how far along the job actually is — if a kitchen remodel is 40% complete on December 31st based on costs incurred, you report 40% of the expected income and costs on that year's return, even though the homeowner hasn't paid the final invoice yet.
Under the completed contract method, none of a project's income or expenses hit your return until the job is substantially finished. A remodel that starts in November 2026 and wraps up in February 2027 would have all of its income and expenses land on your 2027 return — nothing in 2026, regardless of how much cash came in during that stretch.
| Method | When Income Is Reported | Best For |
|---|---|---|
| Percentage of Completion | Spread across years based on progress | Steadier, more predictable reported income |
| Completed Contract | All at once, in the year the job finishes | Deferring tax and improving short-term cash flow |
Most home improvement and remodeling businesses qualify for an exception that larger contractors don't get. If your average annual gross receipts over the prior three years fall under roughly $31 million for 2026, and your typical project is expected to be completed within two years, you generally qualify as a small contractor and can choose the completed contract method, the cash method, or another exempt-contract approach instead of being forced into percentage-of-completion.
Most home improvement, drywall, and window installation businesses are nowhere near the $31 million threshold, which means this choice is genuinely available to almost every business in this trade — it's simply a matter of whether the election has actually been made deliberately, rather than defaulted into.
The appeal of the completed contract method is straightforward: pushing recognition of income — and the tax on it — into a later year improves cash flow during the project itself, since you're not paying tax on revenue tied up in materials and labor you haven't fully been paid for yet. For a business with steady project flow, this can mean consistently lower tax in any given year compared to recognizing income as work progresses.
The trade-off is that completed contract reporting can make your income look "lumpy" from year to year — long stretches with little reported activity, followed by a sudden spike when projects wrap up. This can complicate things if you're trying to show a lender or a potential business partner a steady, predictable income trend, since percentage-of-completion generally presents a smoother picture of ongoing performance.
There's an additional, more favorable carve-out specifically for contracts where at least 80% of the estimated total costs relate to constructing or improving residential dwelling units. Recent legislation expanded this further, broadening what counts as a qualifying residential project. For a home improvement business whose work is overwhelmingly residential — additions, full kitchen and bath remodels, whole-house window replacement — this test is usually met without much difficulty, reinforcing the same completed contract option already available under the small contractor exception.
Whichever method you use, both require knowing your actual costs on each project with reasonable accuracy. Percentage-of-completion can't be calculated without knowing costs incurred to date against total estimated costs, and completed contract reporting still needs a clear point at which a job is considered substantially finished. A business that doesn't track materials, labor, and subcontractor costs by individual project — rather than lumped together across the whole business — can't reliably use either method correctly, regardless of which one is elected.
At Mercer Flanagan, we work with home improvement, drywall, window, and glass installation businesses throughout Frederick County and central Maryland to choose the right accounting method for multi-month projects, set up job costing that supports the method you use, and plan around the cash flow timing each method creates.
Book a free consultation and we'll walk through your specific situation — no pressure, no obligation.
Book a Free ConsultationNot necessarily. Most home improvement businesses qualify for the small contractor exception, which allows the completed contract method instead, as long as gross receipts and project length fall within the IRS thresholds.
It depends on your specific situation, but completed contract reporting generally defers tax to a later year, which can improve cash flow during active projects, while percentage-of-completion gives a steadier, more predictable picture of income year over year.
Changing an accounting method generally requires IRS approval through a formal request, so it's worth choosing deliberately at the start rather than treating it as something easily adjusted later.
By Roy Cogliandolo, CPA · Mercer Flanagan · March 22, 2026
This article is for general informational purposes and reflects tax rules current as of 2026. Gross receipts thresholds and method eligibility are subject to change — confirm current figures with your CPA before relying on this information.