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Internal Revenue Service
Construction Industry
Audit Technique Guide (ATG)
NOTE:
This guide is current through the publication date. Since changesmay have occurred after the publication date that would affect the accuracyof this document, no guarantees are made concerning the technicalaccuracy after the publication date.
 
This material was designedspecifically for trainingpurposes only. Under nocircumstances should thecontents be used or cited assustaining a technicalposition.The taxpayer names andaddresses shown in thispublication arehypothetical. They werechosen at random from alist of names of American colleges anduniversities as shown in
Webster’s Dictionary
orfrom a list of names of counties in the UnitedStates as listed in the
U.S. Government Printing Office Style Manual
.
www.irs.gov
Training
3147-123 (10-2004)
 Catalog Number
84851H
 
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CONSTRUCTION INDUSTRY GUIDE
(Formerly Audit Technique Guide)
TABLE OF CONTENTS
Chapter 1: Introduction to the Construction Industry
Intended Audience............................................................................. 1-1The Construction Industry as a Market Segment............................... 1-1Participants in the Construction Industry........................................... 1-2The Contracting Process.................................................................... 1-5Contract Income................................................................................. 1-6 Types of Contracts............................................................................. 1-7Bonding.............................................................................................. 1-8 Building Permits................................................................................ 1-8Notice of Completion......................................................................... 1-9
Chapter 2: Long Term Contracts
Background........................................................................................ 2-1 Definition of Long-Term Contract..................................................... 2-1Contracts Subject to IRC Section 460............................................... 2-1Contracts Exempt from IRS Section 460........................................... 2-2Construction Contracts versus Manufacturing Contracts.................. 2-2Real Property and its Integral Components(Treas. Reg. Section 1.460-3(a)
......
................................................ 2-3Classifications of Contracts............................................................... 2-4Hybrid Contracts................................................................................ 2-5
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 De minimis Construction Activities................................................... 2-5Non-Long-Term Contract Activities(e.g., Architect, Engineer Services)
.................................................
2-6Contracts of Related Parties............................................................... 2-7Severing and Aggregating Contracts................................................. 2-9 
Chapter 3: Small Construction Contractors
Introduction........................................................................................ 3-1 Exceptions to the Percentage of Completion Accounting Methods and Look-Back Interest.................................................................. 3-1Production Period Interest.................................................................. 3-2$10 Million Gross Receipts Test........................................................ 3-2 Determining the Proper Method of Accounting for SmallContractors
......................................................................................
3-4General Rules of Accounting Methods.............................................. 3-4Methods of Accounting...................................................................... 3-5Selecting an Accounting Method....................................................... 3-6Computation of the Cash Method of Accounting.............................. 3-11Accrual Method of Accounting......................................................... 3-11Completed Contract Method (CCM)................................................. 3-14Completion of a Long-Term Contract............................................... 3-14Subcontracts and Completion............................................................ 3-17Exempt-contract Percentage-of-Completion Method (EPCM)......... 3-18Alternative Minimum Tax (AMT)..................................................... 3-19Small Contractors Becoming Large Contractors............................... 3-22Pros and Cons of Long-Term Accounting Methods.......................... 3-22
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