Avoiding Tax Pitfalls When Selling a Contractor Business: Percentage of Completion vs. Completed Contract Methods

If you're a contractor preparing to sell your business, and you use different accounting methods for financial reporting and taxes, there’s a hidden tax trap you need to know about.

Many contractor businesses use the percentage of completion (POC) method for financial reporting—especially for CPA-reviewed statements required by surety companies for bonding. At the same time, they may use the completed contract method (CCM) for tax purposes, which defers income taxes until jobs are finished.

This dual-method setup works well while you operate the business. But it can cause a major issue when it’s time to sell.

The Disconnect That Can Cost You

When marketing your business for sale, your financials—and your Quality of Earnings (QoE) report—will likely be based on the POC method. This gives buyers a clearer and more accurate view of how your business is performing, which is great for valuation.

But here's the problem: buyers don’t want to pay for income that hasn’t been taxed yet. So, they’ll often require that, for tax purposes, the business switches from the completed contract method to percentage of completion at closing.

That switch triggers a "catch-up" tax bill—all the income you've deferred under the completed contract method becomes taxable in one year. And that year is usually the same year you’re already facing capital gains taxes from the sale.

In other words, you could be hit with a double tax burden:

• Ordinary income tax on deferred revenue

• Capital gains tax on the sale proceeds

This surprise can wipe out a big portion of your net proceeds if you’re not prepared.

How to Avoid This Tax Pitfall

The good news? With the right planning, this can be managed—and sometimes even avoided. Here are key steps to take:

1. Plan Ahead with an Experienced CPA

Work with a CPA who understands contractor businesses and how sales are structured. Early planning—ideally at least a year or two before selling—can give you more flexibility in how and when the tax is recognized.

2. Know Your Exposure

Have your CPA estimate how much revenue has been deferred under the completed contract method. Understanding this number early gives you more options for structuring the deal.

3. Structure the Sale Strategically

In some cases, the tax impact can be addressed in how the sale is structured or negotiated with the buyer. But that only works if you plan for it in advance.

4. Coordinate Financial and Tax Planning

If you're marketing the business using POC financials, make sure your tax planning is aligned. Everyone on your deal team—especially your CPA and QoE provider—needs to be on the same page.

How Golden Shield Can Help

At Golden Shield Business Brokers, we understand the unique challenges that come with selling contractor businesses—especially those using dual accounting methods. We work closely with your CPA and advisors to plan ahead, avoid surprises, and help you maximize your after-tax proceeds.

If you’re even thinking about selling in the next few years, now is the time to start planning. Golden Shield can help you build a strategy that protects your hard-earned value and avoids last-minute tax pitfalls.

Thinking about selling your contractor business? Reach out to Golden Shield today—we'll help you build the right plan, from start to close.