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Delayed Reapplication Method

and the corrected Form 8697 shows an

Change Orders

amount on the line for interest to be

For purposes of reapplying the

A change order for a contract is not

refunded to you, you must:

look-back method after the year of

treated as a separate contract for

1. File an amended income tax

contract completion, you may elect the

purposes of applying the look-back

return showing $0 interest from Form

delayed reapplication method to

method unless the change order would

8697 and

minimize the number of required

be treated as a separate contract under

2. File the corrected Form 8697

reapplications of the look-back method

the rules for severing and aggregating

separately (but do not write “Amended”

to minimize the number of required

contracts provided in Regulations

at the top of the form because this is

reapplications of the look-back method.

section 1.460-1(e). Therefore, if a

the first Form 8697 that you will file

Under this method, the look-back

change order is not treated as a

separately).

method is reapplied after the contract

separate contract, that portion of the

•

If the original Form 8697 shows an

completion year (or after a later

actual contract price and contract costs

amount on the line for interest to be

reapplication of the look-back method)

attributable to the change order must

refunded to you and the corrected Form

only when one of the following

be taken into account in allocating

8697 shows an amount on the line for

conditions is met for that contract:

contract income to all tax years of the

interest you owe, you must:

1. The net undiscounted value of

contract, including tax years before the

1. File the corrected Form 8697

increases or decreases in the contract

change order was agreed to.

separately (with “Amended” written at

price occurring from the time of the last

the top) showing $0 interest to be

application of the look-back method

Post-Completion

refunded and

exceeds the smaller of $1 million or

Adjustments

2. File an amended income tax

10% of the total contract price at that

return and attach a copy of the

time,

General Rule

corrected Form 8697.

2. The net undiscounted value of

increases or decreases in contract

If the contract price or costs are revised

Attachments

costs occurring from the time of the last

to reflect amounts properly taken into

application of the look-back method

account after the contract completion

If you need more space, attach

exceeds the smaller of $1 million or

date for any reason, you must apply the

separate sheets to the back of Form

10% of the total actual contract costs at

look-back method in the year such

8697. Put your name and identifying

that time,

amounts are properly taken into

number on each sheet.

3. The taxpayer goes out of

account, even if no other contract is

existence,

Applying the Look-Back

completed in that year. Generally, the

4. The taxpayer reasonably believes

amount of each such post-completion

Method Under Special

the contract is finally settled and

adjustment to total contract price or

closed, or

contract costs is discounted, solely for

Situations

5. None of the above conditions

look-back purposes, from its value at

(1 – 4) are met by the end of the 5th tax

the time the amount is taken into

10% Method

year that begins after the last previous

account in computing taxable income to

application of the look-back method.

its value at the time the contract was

For purposes of the percentage of

completion method, a taxpayer may

completed. The discount rate for this

To elect the delayed reapplication

elect to postpone recognition of income

purpose is the Federal mid-term rate

method, attach a statement to your

and expense under a long-term

under section 1274(d) in effect at the

timely filed income tax return

contract entered into after July 10,

time the amount is properly taken into

(determined with extensions) for the

1989, until the first tax year as of the

account.

first tax year of the election. Indicate on

end of which at least 10% of the

However, you may elect not to

the statement that you are making an

estimated total contract costs have

discount post-completion adjustments

election under Regulations section

been incurred. For purposes of the

1.460-6(e) to use the delayed

for any contract. The election not to

look-back method, the recognition of

reapplication method. Once made, the

discount is made on a

income and expense must be

election is binding for all long-term

contract-by-contract basis and is

postponed for such contracts until the

contracts for which you would reapply

binding with respect to all

first tax year as of the end of which at

the look-back method in the absence of

post-completion adjustments that arise

least 10% of the actual total contract

the election in the year of the election

with respect to that contract. To make

costs have been incurred. Therefore,

and all later years, unless the IRS

this election, attach a statement to your

income and expense will be allocated

consents to a revocation of the election.

timely filed income tax return

to a different tax year if the first tax year

See Regulations section 1.460-6(e) for

(determined with extensions) for the

that the 10% threshold is exceeded

more details.

first tax year after completion in which

based on actual costs differs from the

you take into account any adjustment to

first tax year that the 10% threshold is

the contract price or contract costs.

exceeded based on estimated costs.

Indicate on the statement that you are

The election to use the 10% method

Specific Instructions

making an election not to discount

applies to all long-term contracts

post-completion adjustments under

entered into during the tax year for

All filers must complete the information

which the election is made and all later

Regulations section

at the top of the form above Part I

1.460-6(c)(1)(ii)(C)(2) and identify the

years. See section 460(b)(5) for more

according to the following instructions.

details.

contracts to which the election applies.

Then, complete either Part I or Part II

-3-

Instructions For Form 8697 Draft (Rev. December 2011) - Interest Computation Under The Look-Back Method For Completed Long-Term Contracts Page 3

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