2016 Instructions for Form FTB 3834
Interest Computation Under the Look-Back Method for Completed Long-Term Contracts
References in these instructions are to the Internal Revenue Code (IRC) as of January 1, 2015, and to the California Revenue and Taxation Code (R&TC).
In the year a long-term contract is completed,
January 1, 1998. The look-back method does
the look-back method requires the taxpayer to
not apply in the following cases if the election
In general, for taxable years beginning on or
do the following:
after January 1, 2015, California law conforms
y “Look back” to each of the previous years
1. In the completion year if, for each prior
to the Internal Revenue Code (IRC) as of
during which the contract work was in
contract year, the cumulative taxable
January 1, 2015. However, there are continuing
income (or loss) actually reported under the
differences between California and federal
y Compute interest in those years on the
contract is within 10% of the cumulative
law. When California conforms to federal tax
difference between the tax that was actually
look-back income (or loss). Cumulative
law changes, we do not always adopt all of
paid and the tax that would have been
income (or loss) is the amount of taxable
the changes made at the federal level. For
paid if the taxpayer had known the actual
income (or loss) that you would have
more information, go to ftb.ca.gov and search
contract price and cost of the completed
reported if you had used actual contract
for conformity. Additional information can
price and costs instead of estimated
be found in FTB Pub. 1001, Supplemental
contract price and costs.
Guidelines to California Adjustments, the
Who Must File
2. In a post-completion year if, as of the close
instructions for California Schedule CA (540
of the post-completion year, the cumulative
File form FTB 3834, for the following:
or 540NR), and the Business Entity tax booklets.
taxable income (or loss) under the contract
y Each taxable year the long-term contract is
The instructions provided with California tax
is within 10% of the cumulative look-back
forms are a summary of California tax law
income (or loss) under the contract as of
y Each taxable year the contract price or
and are only intended to aid taxpayers in
the close of the most recent year in which
contract cost is adjusted for one or more
preparing their state income tax returns. We
the look-back method was applied to the
long-term contracts from a prior year.
include information that is most useful to the
contract (or would have been applied if the
See the instructions for federal Form 8697,
greatest number of taxpayers in the limited
election had not been made).
Interest Computation Under the Look-Back
space available. It is not possible to include
For purposes of item 2, discounting under
Method for Completed Long-Term Contracts,
all requirements of the California Revenue
IRC Section 460(b)(2) does not apply.
for more information about filing requirements
and Taxation Code (R&TC) in the instructions.
To make the election, attach a statement to
such as how to determine whether the
Taxpayers should not consider the instructions
your timely filed tax return (determined with
look-back interest computation is required at
as authoritative law.
extensions) for the first taxable year of the
the entity or ownership level in the case of a
election. Write at the top of the statement
pass-through entity (S corporation, estate,
The cumulative effect of applying the look-back
“NOTIFICATION OF ELECTION UNDER IRC
trust, partnership, or limited liability company
method is taken into account beginning in
SECTION 460(b)(6).” Include on the statement
(LLC) treated as a partnership).
the filing year even though look-back interest
your name, identification number, and the
is not computed for that year. Income is
effective date of the election. Also identify the
hypothetically reallocated to or from the filing
trades or businesses that involve long-term
The look-back method does not apply to
year or to or from the redetermination years.
contracts. Once made, the election applies to
regular taxable income from the following
Look-back does not create or decrease income;
all contracts completed during the election year
it only hypothetically changes the tax year of
and all later taxable years. The election may not
y Any home construction contract, as defined
be revoked except with the written consent of
in IRC Section 460(e)(6)(A).
Registered Domestic Partners (RDP)
the Franchise Tax Board (FTB).
y Any construction contract entered into:
For purposes of California income tax,
Contract Commencement Date. The first
(a) that you estimate the contract will
references to a spouse, husband, or wife also
date on which any costs (other than bidding
be completed within two years from the
refer to a RDP, unless otherwise specified.
expenses or expenses incurred in connection
contract commencement date, and
When we use the initials RDP they refer to both
with negotiating the contract) allocable to the
(b) where average annual gross receipts for
a California registered domestic “partner” and
contract are incurred. For more information,
the three taxable years before the taxable
a California registered domestic “partnership,”
see IRC Section 460(g).
year the contract is entered into do not
as applicable. For more information on
exceed $10 million. See IRC Section 460(e).
When to File
RDPs, get FTB Pub. 737, Tax Information for
y Any contract completed within two years
Registered Domestic Partners.
File form FTB 3834 at the time you are required
from the contract commencement date,
Private Mail Box (PMB)
to file your California tax return (including
if the gross price of the contract (as of
Include the PMB in the address field. Write
extensions) for your taxable year in which one
contract completion) does not exceed the
“PMB” first, then the box number. Example:
or more long-term contracts are completed (or
smaller of any of the following items:
111 Main Street PMB 123.
at any other time required by IRC Section 460
(a) $1 million.
or the regulations thereunder).
(b) One percent of average annual gross
receipts for the three tax years before
y Individuals, estates, or trusts, sign Side 2
Use form FTB 3834, Interest Computation
the tax year of contract completion.
and file form FTB 3834 as a separate return.
Under the Look-Back Method for Completed
See IRC Section 460(b)(3)(B) for more
Do not attach it to Form 540, California
Long-Term Contracts, to compute the interest
Resident Income Tax Return; Long
due, or to be refunded using the look-back
Form 540NR, California Nonresident or
De Minimis Exception. You may elect not
method under IRC Section 460(b)(2), on
Part-Year Resident Income Tax Return; or
to apply the look-back method in certain
certain long-term contracts entered into after
Form 541, California Fiduciary Income Tax
de minimis cases for contracts completed
February 28, 1986, that are accounted for
in taxable years beginning on or after
under either the percentage of completion
method or the percentage of completion
capitalized cost method.
FTB 3834 Instructions 2016 Page 1