Who Is It That Says Home Builders Must Base Their Income On Earned Revenue?

Depending on whether you are reporting for financial statements or tax purposes, two different authorities dictate that home builders base their income on earned revenues rather than just when cash is collected:

1. For Financial Statements: FASB (Financial Accounting Standards Board)

• The Authority: FASB issues US GAAP, specifically ASC 606 (Revenue from Contracts with Customers).

• The Rule: Home builders and real estate developers must recognize revenue when control of a home or property is transferred to the buyer (usually at closing) to reflect the earned amount. For long-term or custom contracts, builders may be required to recognize revenue over time using the percentage-of-completion method.

2. For Tax Returns: The IRS (Internal Revenue Service)

• The Authority: The IRS regulates this via Internal Revenue Code (IRC) Section 460.

• The Rule: The IRS mandates that construction contract income be reported using earned revenue methods—primarily the Percentage-of-Completion Method (PCM). However, qualified home builders are granted an exception and are permitted to use the Completed-Contract Method (CCM), which still strictly dictates that all income and expenses be recognized in the tax year the project is completed.