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Instructions for Form 8697

Department of the Treasury

Internal Revenue Service

(Rev. December 2011)

Interest Computation Under the Look-Back Method for Completed Long-Term

Contracts

Section references are to the Internal

long-term contract entered into after

Schedule K-1 the information you need

February 28, 1986, that you accounted

to complete this form.

Revenue Code unless otherwise noted.

for using either the percentage of

General Instructions

Mid-Contract Change in

completion method or the percentage of

Taxpayer

completion-capitalized cost method for

What’s New

Federal income tax purposes. You also

If prior to the completion of a long-term

must file Form 8697 for any tax year,

contract accounted for using the

•

Form 8697 has been revised to

subsequent to the year of completion,

percentage of completion method or the

provide a column for the filing year. The

in which the contract price or contract

percentage of completion capitalized

cumulative effect of applying the

costs are adjusted for one or more of

cost method, there is a transaction that

look-back is taken into account

these long-term contracts from a prior

makes another taxpayer responsible for

beginning in the filing year even though

year.

accounting for income from the same

look-back interest is not computed for

contract, the taxpayer responsible for

that year. Income is hypothetically

Pass-Through Entities

filing look-back interest depends on

reallocated to or from the filing year or

whether the ownership change is due

from the redetermination years.

A pass-through entity (partnership, S

to a constructive completion transaction

Look-back does not create or decrease

corporation, or trust) that is not closely

or a step-in-the shoes transaction. For

income, it only hypothetically changes

held must apply the look-back method

guidance regarding these transactions,

the tax year of recognition.

at the entity level to any contract for

see Regulations 1.460-4(g). In the case

•

A second signature line has been

which at least 95% of the gross income

of constructive completion transactions,

added for the spouse’s signature if a

is from U.S. sources. A pass-through

the old taxpayer applies the look-back

joint tax return was filed.

entity is considered closely held if, at

method to the pre-transaction years

•

The tax rates used for the interest

any time during any tax year for which

and the new taxpayer applies the

computation have changed. See the

there is income under the contract,

look-back method to the

instructions for line 2, later.

50% or more (by value) of the

post-transaction years. In the case of

•

The IRS has created a page on

beneficial interests in the entity is held

step-in-the-shoes transactions, the new

IRS.gov for information about Form

(directly or indirectly) by or for five or

taxpayer applies the look-back method

fewer persons. For this purpose, rules

8697 and its instructions, at

to both the pre and post transaction

gov/form8697.

Information about any

similar to the constructive ownership

years. See Regulations section

future developments affecting Form

rules of section 1563(e) apply. For a

1.460-6(g) for additional guidance.

8697 (such as legislation enacted after

mid-contract change in taxpayer

we release it) will be posted on that

resulting in the conversion of a C

Exception for Certain

page.

corporation into an S corporation, the

Construction Contracts

look-back method is applied at the

Purpose of Form

The look-back method does not apply

entity level with respect to contracts

to the regular taxable income from:

entered into prior to the pre-transaction

Use Form 8697 to figure the interest

•

Any home construction contract (as

years regardless of whether the S

due or to be refunded under the

defined in section 460(e)(6)(A)) or

corporation is considered closely held.

look-back method of section 460(b)(2)

•

Any other construction contract

See the section discussing

on certain long-term contracts that are

entered into by a taxpayer: (a) who

Mid-Contract Change in Taxpayer.

accounted for under either the

estimates the contract will be

percentage of completion method or the

completed within 2 years from the date

If you are an owner of an interest in

percentage of completion-capitalized

the contract begins and (b) whose

a pass-through entity for every year in

cost method. For guidance concerning

average annual gross receipts for the 3

which a long-term contract was being

these methods, see Regulations

tax years preceding the tax year in

accounted for under the percentage of

1.460-4. For details and computational

which the contract is entered into do

completion method or the percentage of

examples illustrating the use of the

not exceed $10 million. See section

completion-capitalized cost method and

look-back method, see Regulations

460(e).

the pass-through entity is not subject to

section 1.460-6.

the look-back method at the entity level,

However, the look-back method

you must file this form for your tax year

does apply to the alternative minimum

Who Must File

that ends with or includes the end of

taxable income from any such contract

the entity’s tax year in which the

that must be accounted for using the

General Rule

contract was completed or adjusted in a

percentage of completion method for

You must file Form 8697 for each tax

post-completion tax year. The

alternative minimum tax purposes. See

year in which you completed a

pass-through entity will provide on

section 56(a)(3) for details.

Jan 05, 2012

Cat. No. 10703K

Instructions For Form 8697 Draft (Rev. December 2011) - Interest Computation Under The Look-Back Method For Completed Long-Term Contracts

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