Which method so-called service-based profits might differ in financial versus tax reporting?

The completed contract method is a technique used in revenue recognition for long-term projects where revenue and expenses are recognized only upon the completion of the contract. This method can lead to significant differences between financial reporting and tax reporting.

In financial accounting, companies may choose this method to defer the recognition of revenues and profits until all work is completed, which can provide a more stable and predictable financial picture in the interim. On the other hand, for tax purposes, the IRS typically requires businesses to use the completed contract method for long-term contracts, as it allows a more straightforward basis for recognizing income. This can sometimes result in differences in the profit reported in financial statements compared to what is reported for tax purposes.

Other methods, like the percentage of completion method, can result in revenue being recognized over the life of the project, often aligning both financial and tax reporting more closely. Accrual accounting, while it can show differences in timing of revenue and expense recognition, does not specifically isolate service-based projects. Cash basis accounting, on the other hand, recognizes income and expenses only when cash is received or paid, leading to a fundamentally different approach to reporting altogether that doesn't focus on service-based profits in the same way as the completed contract method does.