Gross Receipts Test Contractors Must Know: The $32M Line
The gross receipts test contractors must meet under Section 448(c) is one of the most important numbers in construction tax planning. For 2026, the line is average annual gross receipts of $32,000,000 or less over the prior 3 tax years. Stay under it, and you have a menu of accounting methods to choose from. Go over it, and several of those choices close.
For contractors in the $5M to $50M range, this line often falls right in the middle of your growth path. That makes it worth understanding before you cross it.
How the Gross Receipts Test Contractors Face Is Calculated
The test looks backward. For your 2026 tax year, you average your gross receipts from the 3 prior tax years. If that average is $32,000,000 or less, you meet the test for 2026. For 2025, the threshold was $31,000,000, and it is adjusted for inflation over time.
Gross receipts generally means total sales and other receipts before subtracting costs. For a contractor, that is primarily contract revenue, plus other income such as equipment rental to others or interest.
Pay attention to how your revenue is measured. Gross receipts follow your tax books, not your backlog or your surety work-in-progress schedule. A general contractor that passes most of its contract value through to subs still counts the full contract revenue it receives. Paying a sub does not reduce gross receipts. Owners are sometimes surprised to learn that a company with thin margins and heavy sub costs can sit above the line while a more profitable self-performing trade contractor sits below it.
Example: Averaging three years
A mechanical subcontractor has these gross receipts:
2023: $28,000,000
2024: $31,000,000
2025: $36,000,000
Total: $95,000,000. Average: $95,000,000 divided by 3 = about $31,666,667. That is under $32,000,000, so the company meets the test for 2026, even though 2025 alone was above the line.
Now look ahead. If 2026 receipts are $38,000,000, the 2027 test averages 2024, 2025, and 2026: $31,000,000 plus $36,000,000 plus $38,000,000 = $105,000,000, divided by 3 = $35,000,000. Unless the 2027 threshold rises enough to cover that, the company likely fails the test in 2027. This is the kind of forecast you want a year ahead.
Aggregation: Related Businesses Count Together
You cannot stay under the line just by splitting work across entities. Aggregation rules generally combine the gross receipts of related businesses under common control.
Common contractor setups that may be aggregated include:
An operating company and a separate equipment leasing company owned by the same people.
Two trade companies (for example, an electrical company and a low-voltage company) with the same owners.
A parent company and its subsidiaries.
If your operating company does $24,000,000 and a commonly owned sister company does $12,000,000, the combined group may be tested at $36,000,000. Ownership percentages and family attribution rules matter, so map out your ownership chart with your tax advisor.
What Meeting the Test Makes Available
Staying under the gross receipts test opens several tax options that larger contractors generally do not get.
Small contractor exception for long-term contracts
Contractors that meet the test can use the small contractor exception from Section 460 for contracts expected to be completed within 3 years. OBBBA expanded this from 2 years for contracts entered into in tax years beginning after July 4, 2025. Exempt contracts can use completed contract, accrual, cash, or other permissible methods instead of percentage of completion.
Overall cash method
Businesses under the test may be able to use the cash method of accounting overall, recognizing income when received and deducting expenses when paid. For contractors with large receivables and retainage, that can defer income, though it needs to be weighed against other factors.
Simplified inventory and cost capitalization rules
Smaller businesses can generally use simplified rules for inventories and are exempt from certain cost capitalization requirements. For contractors who stock materials or fabricate in a shop, this can reduce compliance work.
Business interest exemption
Small businesses under the test are exempt from the Section 163(j) business interest limitation. For contractors carrying equipment loans and lines of credit, that means interest is not capped under that rule.
When You Are About to Cross the Line
Crossing the $32,000,000 average does not happen by surprise if you forecast. When it gets close, plan for:
Method changes. You may need to move long-term contracts to percentage of completion and possibly switch off the cash method. Changes generally require Form 3115, and many are automatic.
Contract timing. Contracts entered into while you still meet the test may keep their exempt status, depending on the facts. Signing dates can matter.
Income catch-up. Switching methods can create an adjustment that pulls deferred income into taxable income, often spread over time. Model it early.
Interest limits. Once over the test, Section 163(j) may apply. OBBBA restored the EBITDA-based calculation, which helps equipment-heavy contractors.
Going the other way matters too. If receipts dip below the line after a slow year, you may regain access to these methods. Method choices are a planning lever in both directions.
How This Connects to Your Bonding
Your tax methods and your surety financial statements are separate. A contractor under the test can use completed contract or cash for tax while its reviewed or audited statements follow GAAP, which sureties rely on.
That split is legitimate, but it needs managing. Deferring tax should not weaken the statements your surety reads, and your financial statement preparer should understand the tax methods you use. When you cross the line, expect your tax income to move closer to your book income, and plan cash for the tax that follows.
Frequently Asked Questions
What is the gross receipts test for 2026?
For 2026, a business meets the Section 448(c) test if its average annual gross receipts over the prior 3 tax years are $32,000,000 or less. The 2025 amount was $31,000,000.
Do I combine gross receipts from my other companies?
Often yes. Aggregation rules generally combine related businesses under common control, such as an operating company and a commonly owned equipment company.
What happens if my construction company goes over $32 million?
You generally lose access to the small contractor exception and the overall cash method, and may become subject to the business interest limit. Method changes usually need Form 3115, so plan ahead.
Talk to a Contractor Tax Specialist
Payless Taxes works with bonded commercial contractors from $5M to $50M in revenue nationwide. We forecast your gross receipts and plan method changes before they are forced on you. Book a 30-minute call to see where you stand.
This article is general information, not tax or legal advice. Tax rules change and depend on your specific facts. Talk with a qualified tax professional before acting.
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