Instructions for IRS Form 8697 "Interest Computation Under the Look-Back Method for Completed Long-Term Contracts"

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Instructions for Form 8697
Department of the Treasury
Internal Revenue Service
(Rev. November 2018)
Interest Computation Under the Look-Back Method for Completed Long-Term
Contracts
subsequent to the year of completion, in
computing look-back interest depends
Section references are to the Internal Revenue
Code unless otherwise noted.
which the contract price or contract
on whether the ownership change is
costs are adjusted for one or more of
due to a constructive completion
General Instructions
these long-term contracts from a prior
transaction or a step-in-the shoes
year.
transaction. For guidance regarding
Future Developments
these transactions, see Regulations
Pass-Through Entities
section 1.460-4(g). In the case of
For the latest information about
A pass-through entity (partnership, S
constructive completion transactions,
developments related to Form 8697 and
corporation, or trust) that is not closely
the old taxpayer treats the contract as
its instructions, such as legislation
held must apply the look-back method
completed in the transaction year and
enacted after they were published, go to
at the entity level to any contract for
applies the look-back method to the
IRS.gov/Form8697.
which at least 95% of the gross income
pre-transaction years. The new
is from U.S. sources. A pass-through
What's New
taxpayer is treated as entering into a
entity is considered closely held if, at
new contract and applies the look-back
The tax rate used for the interest
any time during any tax year for which
method to the post-transaction years
computation for individuals,
there is income under the contract, 50%
upon the contract's completion. In the
corporations, and certain pass-through
or more (by value) of the beneficial
case of step-in-the-shoes transactions,
entities has changed. See the
interests in the entity is held (directly or
the new taxpayer applies the look-back
instructions for Part II,
line
2, later.
indirectly) by or for five or fewer
method to both the pre- and post-
The 2-year carryback rule will
persons. For this purpose, rules similar
transaction years. See Regulations
generally not apply to net operating
to the constructive ownership rules of
section 1.460-6(g) for additional
losses (NOLs) arising in tax years
section 1563(e) apply. For a
guidance.
ending after 2017. Exceptions apply to
mid-contract change in taxpayer
Exception for Certain
NOLs for farmers and non-life insurance
resulting in the conversion of a C
companies. See section 172(b) as
Construction Contracts
corporation into an S corporation, the
amended by P.L. 115-97, section
look-back method is applied at the entity
The look-back method does not apply to
13302.
level with respect to contracts entered
the regular taxable income from:
For tax years beginning after 2017,
into prior to the conversion regardless of
Any home construction contract (as
the alternative minimum tax for
whether the S corporation is considered
defined in section 460(e)(5)(A)) or
corporations has been repealed.
closely held. See the section discussing
Any other construction contract
Mid-Contract Change in Taxpayer.
entered into by a taxpayer: (a) who
Purpose of Form
estimates the contract will be completed
If you are an owner of an interest in a
Use Form 8697 to figure the interest due
within 2 years from the date the contract
pass-through entity in which a long-term
or to be refunded under the look-back
begins and (b) whose average annual
contract was being accounted for under
method of section 460(b)(2) on certain
gross receipts for the 3 tax years
the percentage of completion method or
long-term contracts that are accounted
preceding the tax year in which the
the percentage of completion
for under either the percentage of
contract is entered into do not exceed
capitalized cost method and the
completion method or the percentage of
$10 million. The annual gross receipts is
pass-through entity is not subject to the
completion-capitalized cost method. For
increased to $25 million (adjusted for
look-back method at the entity level, you
guidance concerning these methods,
inflation) for contracts entered into after
must file this form for your tax year that
see Regulations section 1.460-4. For
2017. See section 460(e).
ends with or includes the end of the
details and computational examples
entity's tax year in which the contract
However, the look-back method does
illustrating the use of the look-back
was completed or adjusted in a
apply to the alternative minimum taxable
method, see Regulations section
post-completion tax year. The
income from any such contract that is
1.460-6.
pass-through entity will provide on
not a home construction contract and,
Schedule K-1 the information you need
Who Must File
therefore, must be accounted for using
to complete this form.
the percentage of completion method
General Rule
Mid-Contract Change in
for alternative minimum tax purposes.
See section 56(a)(3) for details.
You must file Form 8697 for each tax
Taxpayer
year in which you completed a
Small Contract Exception
If prior to the completion of a long-term
long-term contract entered into after
contract accounted for using the
The look-back method does not apply to
February 28, 1986, that you accounted
percentage of completion method or the
any contract completed within 2 years of
for using either the percentage of
percentage of completion capitalized
the contract start date if the gross price
completion method or the percentage of
cost method, there is a transaction that
of the contract (as of contract
completion-capitalized cost method for
makes another taxpayer responsible for
completion) does not exceed the
federal income tax purposes. You also
accounting for income from the same
smaller of:
must file Form 8697 for any tax year,
contract, the taxpayer responsible for
Oct 22, 2018
Cat. No. 10703K
Instructions for Form 8697
Department of the Treasury
Internal Revenue Service
(Rev. November 2018)
Interest Computation Under the Look-Back Method for Completed Long-Term
Contracts
subsequent to the year of completion, in
computing look-back interest depends
Section references are to the Internal Revenue
Code unless otherwise noted.
which the contract price or contract
on whether the ownership change is
costs are adjusted for one or more of
due to a constructive completion
General Instructions
these long-term contracts from a prior
transaction or a step-in-the shoes
year.
transaction. For guidance regarding
Future Developments
these transactions, see Regulations
Pass-Through Entities
section 1.460-4(g). In the case of
For the latest information about
A pass-through entity (partnership, S
constructive completion transactions,
developments related to Form 8697 and
corporation, or trust) that is not closely
the old taxpayer treats the contract as
its instructions, such as legislation
held must apply the look-back method
completed in the transaction year and
enacted after they were published, go to
at the entity level to any contract for
applies the look-back method to the
IRS.gov/Form8697.
which at least 95% of the gross income
pre-transaction years. The new
is from U.S. sources. A pass-through
What's New
taxpayer is treated as entering into a
entity is considered closely held if, at
new contract and applies the look-back
The tax rate used for the interest
any time during any tax year for which
method to the post-transaction years
computation for individuals,
there is income under the contract, 50%
upon the contract's completion. In the
corporations, and certain pass-through
or more (by value) of the beneficial
case of step-in-the-shoes transactions,
entities has changed. See the
interests in the entity is held (directly or
the new taxpayer applies the look-back
instructions for Part II,
line
2, later.
indirectly) by or for five or fewer
method to both the pre- and post-
The 2-year carryback rule will
persons. For this purpose, rules similar
transaction years. See Regulations
generally not apply to net operating
to the constructive ownership rules of
section 1.460-6(g) for additional
losses (NOLs) arising in tax years
section 1563(e) apply. For a
guidance.
ending after 2017. Exceptions apply to
mid-contract change in taxpayer
Exception for Certain
NOLs for farmers and non-life insurance
resulting in the conversion of a C
companies. See section 172(b) as
Construction Contracts
corporation into an S corporation, the
amended by P.L. 115-97, section
look-back method is applied at the entity
The look-back method does not apply to
13302.
level with respect to contracts entered
the regular taxable income from:
For tax years beginning after 2017,
into prior to the conversion regardless of
Any home construction contract (as
the alternative minimum tax for
whether the S corporation is considered
defined in section 460(e)(5)(A)) or
corporations has been repealed.
closely held. See the section discussing
Any other construction contract
Mid-Contract Change in Taxpayer.
entered into by a taxpayer: (a) who
Purpose of Form
estimates the contract will be completed
If you are an owner of an interest in a
Use Form 8697 to figure the interest due
within 2 years from the date the contract
pass-through entity in which a long-term
or to be refunded under the look-back
begins and (b) whose average annual
contract was being accounted for under
method of section 460(b)(2) on certain
gross receipts for the 3 tax years
the percentage of completion method or
long-term contracts that are accounted
preceding the tax year in which the
the percentage of completion
for under either the percentage of
contract is entered into do not exceed
capitalized cost method and the
completion method or the percentage of
$10 million. The annual gross receipts is
pass-through entity is not subject to the
completion-capitalized cost method. For
increased to $25 million (adjusted for
look-back method at the entity level, you
guidance concerning these methods,
inflation) for contracts entered into after
must file this form for your tax year that
see Regulations section 1.460-4. For
2017. See section 460(e).
ends with or includes the end of the
details and computational examples
entity's tax year in which the contract
However, the look-back method does
illustrating the use of the look-back
was completed or adjusted in a
apply to the alternative minimum taxable
method, see Regulations section
post-completion tax year. The
income from any such contract that is
1.460-6.
pass-through entity will provide on
not a home construction contract and,
Schedule K-1 the information you need
Who Must File
therefore, must be accounted for using
to complete this form.
the percentage of completion method
General Rule
Mid-Contract Change in
for alternative minimum tax purposes.
See section 56(a)(3) for details.
You must file Form 8697 for each tax
Taxpayer
year in which you completed a
Small Contract Exception
If prior to the completion of a long-term
long-term contract entered into after
contract accounted for using the
The look-back method does not apply to
February 28, 1986, that you accounted
percentage of completion method or the
any contract completed within 2 years of
for using either the percentage of
percentage of completion capitalized
the contract start date if the gross price
completion method or the percentage of
cost method, there is a transaction that
of the contract (as of contract
completion-capitalized cost method for
makes another taxpayer responsible for
completion) does not exceed the
federal income tax purposes. You also
accounting for income from the same
smaller of:
must file Form 8697 for any tax year,
contract, the taxpayer responsible for
Oct 22, 2018
Cat. No. 10703K
Filing Instructions
$1 million or
All others:
1% of the taxpayer's average annual
If You Owe Interest (or No
Department of Treasury
gross receipts for the 3 tax years before
Internal Revenue Service
Interest Is To Be Refunded to
the tax year of contract completion.
Cincinnati, OH 45999-0001
You)
See section 460(b)(3)(B) for details.
Complete the signature section of
Attach Form 8697 to your income tax
De Minimis Exception
Form 8697 following the instructions for
return. The signature section of Form
the signature section of your income tax
You may elect not to apply the
8697 does not have to be completed by
return. If you file a joint return, the
look-back method in certain de minimis
you or the paid preparer.
signature of both spouses is required on
cases for completed contracts. The
Form 8697. If additional Forms 8697 are
For individuals, include any interest
look-back method does not apply in the
due in the amount to be entered for total
needed to show more than 2
following cases if the election is made.
tax (after credits and other taxes) on
redetermination years, sign only the first
1. In the completion year if, for each
your return (for example, 2018 Form
Form 8697.
prior contract year, the cumulative
1040, line 15). Write on the dotted line
File Form 8697 by the date you are
taxable income (or loss) actually
to the left of the entry space “From Form
required to file your income tax return
reported under the contract is within
8697” and the amount of interest due.
(including extensions). Keep a copy of
10% of the cumulative look-back
Form 8697 and any attached schedules
income (or loss). Cumulative look-back
For partnerships (that are not closely
for your records.
income (or loss) is the amount of
held), write “From Form 8697” and
taxable income (or loss) that you would
include any interest due in the bottom
Filing a Corrected Form
have reported if you had used actual
margin of the tax return. Attach a check
8697
contract price and costs instead of
or money order for the full amount made
estimated contract price and costs.
payable to “United States Treasury.”
You must file a corrected Form 8697
Write the partnership's employer
2. In a post-completion year if, as of
only if the amount shown on Part I,
identification number (EIN), daytime
the close of the post-completion year,
line 6, or Part II, line 7, for any prior year
phone number, and “Form 8697
the cumulative taxable income (or loss)
changes as a result of an error you
Interest” on the check or money order.
under the contract is within 10% of the
made, an income tax examination, or
cumulative look-back income (or loss)
the filing of an amended tax return.
For S corporations that are not
under the contract as of the close of the
closely held, include any interest due in
When completing Part I, line 1, of the
most recent year in which the look-back
the amount to be entered for additional
corrected Form 8697, follow the
method was applied to the contract (or
taxes (for example, 2018 Form 1120S,
instructions on the form but do not enter
would have been applied if the election
line 22c). Write on the dotted line to the
the adjusted taxable income from Part I,
had not been made).
left of the entry space “From Form 8697”
line 3, of the original Form 8697. When
and the amount of interest due. A
completing Part I, line 5 (or Part II,
For purposes of item 2, discounting
closely held S corporation would also
line 6), of the corrected Form 8697, do
under section 460(b)(2) does not apply.
follow these procedures following a
not include the interest due, if any, from
To make the election, attach a
conversion from a C corporation for the
Part I, line 10 (or Part II, line 11), of the
statement to your timely filed income tax
contracts entered into prior to the
original Form 8697 that was included in
return (determined with extensions) for
conversion. See the rules related to
your total tax when Form 8697 was filed
the first tax year of the election. Write at
Mid-Contract Change in
Taxpayer,
with your tax return.
the top of the statement
earlier.
If both the original and corrected
“NOTIFICATION OF ELECTION
Forms 8697 show an amount on the line
For closely held pass-through
UNDER SECTION 460(b)(6).” Include
for interest you owe, file an amended
entities, look-back interest is applied at
on the statement your name, identifying
income tax return.
the owner level and not the entity level.
number, and the effective date of the
If both the original and corrected
election. Also identify the trades or
Forms 8697 show an amount on the line
For corporations, include the amount
businesses that involve long-term
for interest to be refunded to you, write
of interest due on the appropriate line of
contracts. Once made, the election
“Amended” in the top margin of the
Form 1120, Schedule J, Part I (for
applies to all contracts completed
corrected Form 8697, and file it
example, 2018 Form 1120, Schedule J,
during the election year and all later tax
separately.
line 9c).
years, and may not be revoked without
If your original Form 8697 shows an
Look-back interest owed is not
IRS consent. See Regulations section
amount on the line for interest you owe
subject to the estimated tax penalty.
1.460-6(j) for more details. If you timely
and the corrected Form 8697 shows an
See Regulations section 1.460-6(f)(2).
filed your return without making the
amount on the line for interest to be
election, you may make the election on
refunded to you, you must:
If Interest Is To Be Refunded to
an amended return filed no later than 6
1. File an amended income tax
You
months after the due date of your tax
return showing $0 interest from Form
Do not attach Form 8697 to your income
return (excluding extensions). Write
8697 and
tax return. Instead, file Form 8697
“Filed pursuant to section 301.9100” at
2. File the corrected Form 8697
separately with the IRS at the applicable
the top of the amended return.
separately (but do not write “Amended”
address listed below.
at the top of the form because this is the
Individuals:
first Form 8697 that you will file
Department of Treasury
separately).
Internal Revenue Service
If the original Form 8697 shows an
Philadelphia, PA 19255-0001
amount on the line for interest to be
-2-
refunded to you and the corrected Form
including tax years before the change
10% of the total contract price at that
8697 shows an amount on the line for
order was agreed to.
time,
interest you owe, you must:
2. The net undiscounted value of
Post-Completion Adjustments
1. File the corrected Form 8697
increases or decreases in contract costs
separately (with “Amended” written at
occurring from the time of the last
General Rule
the top) showing $0 interest to be
application of the look-back method
refunded and
If the contract price or costs are revised
exceeds the smaller of $1 million or
to reflect amounts properly taken into
10% of the total actual contract costs at
2. File an amended income tax
account after the contract completion
that time,
return and attach a copy of the
date for any reason, you must apply the
corrected Form 8697.
3. The taxpayer goes out of
look-back method in the year such
existence,
Attachments
amounts are properly taken into
4. The taxpayer reasonably believes
account, even if no other contract is
If you need more space, attach separate
the contract is finally settled and closed,
completed in that year. Generally, the
sheets to the back of Form 8697. Put
or
amount of each such post-completion
your name and identifying number on
5. None of the above conditions
adjustment to total contract price or
each sheet.
(1–4) are met by the end of the 5th tax
contract costs is discounted, solely for
year that begins after the last previous
look-back purposes, from its value at
Applying the Look-Back
application of the look-back method.
the time the amount is taken into
Method Under Special
account in computing taxable income to
To elect the delayed reapplication
Situations
its value at the time the contract was
method, attach a statement to your
completed. The discount rate for this
10% Method
timely filed income tax return
purpose is the federal midterm rate
(determined with extensions) for the first
under section 1274(d) in effect at the
For purposes of the percentage of
tax year of the election. Indicate on the
time the amount is properly taken into
completion method, a taxpayer may
statement that you are making an
account.
elect to postpone recognition of income
election under Regulations section
and expense under a long-term contract
1.460-6(e) to use the delayed
However, you may elect not to
entered into after July 10, 1989, until the
reapplication method. Once made, the
discount post-completion adjustments
first tax year as of the end of which at
election is binding for all long-term
for any contract. The election not to
least 10% of the estimated total contract
contracts for which you would reapply
discount is made on a
costs have been incurred. For purposes
the look-back method in the absence of
contract-by-contract basis and is
of the look-back method, the recognition
the election in the year of the election
binding with respect to all
of income and expense must be
and all later years, unless the IRS
post-completion adjustments that arise
postponed for such contracts until the
consents to a revocation of the election.
with respect to that contract. To make
first tax year as of the end of which at
See Regulations section 1.460-6(e) for
this election, attach a statement to your
least 10% of the actual total contract
more details.
timely filed income tax return
costs have been incurred. Therefore,
(determined with extensions) for the first
income and expense will be allocated to
Specific Instructions
tax year after completion in which you
a different tax year if the first tax year
take into account any adjustment to the
that the 10% threshold is exceeded
contract price or contract costs. Indicate
All filers must complete the information
based on actual costs differs from the
on the statement that you are making an
at the top of the form above Part I
first tax year that the 10% threshold is
election not to discount post-completion
according to the following instructions.
exceeded based on estimated costs.
adjustments under Regulations section
Then, complete either Part I or Part II as
The election to use the 10% method
1.460-6(c)(1)(ii)(C)(2) and identify the
appropriate. Also sign the form at the
applies to all long-term contracts
contracts to which the election applies.
bottom of page 2 if interest is to be
entered into during the tax year for
refunded to you. A signature is not
which the election is made and all later
Delayed Reapplication Method
required if you are filing the form with
years. See section 460(b)(5) for more
your tax return.
details.
For purposes of reapplying the
look-back method after the year of
Change Orders
Filing Year
contract completion, you may elect the
A change order for a contract is not
Fill in the filing year line at the top of the
delayed reapplication method to
treated as a separate contract for
form to show the tax year in which the
minimize the number of required
purposes of applying the look-back
contracts for which this form is being
reapplications of the look-back method.
method unless the change order would
filed were completed or adjusted in a
Under this method, the look-back
be treated as a separate contract under
post-completion year. If you were an
method is reapplied after the contract
the rules for severing and aggregating
owner of an interest in a pass-through
completion year (or after a later
contracts provided in Regulations
entity that has completed or adjusted
reapplication of the look-back method)
section 1.460-1(e). Therefore, if a
one or more contracts, enter your tax
only when one of the following
change order is not treated as a
year that ends with or includes the end
conditions is met for that contract:
separate contract, that portion of the
of the entity's tax year in which the
1. The net undiscounted value of
actual contract price and contract costs
contracts were completed or adjusted.
increases or decreases in the contract
attributable to the change order must be
price occurring from the time of the last
taken into account in allocating contract
Name
application of the look-back method
income to all tax years of the contract,
Enter the name shown on your federal
exceeds the smaller of $1 million or
income tax return for the filing year. If
-3-
Line 2
Line 3
you are an individual filing a joint return,
also enter your spouse's name as
In each column, show a net increase to
If line 3 results in a negative amount, it
shown on Form 1040.
income as a positive amount and a net
represents a look-back net operating
decrease to income as a negative
loss (NOL). The adjustment in line 2
Address
amount.
either created, increased, or decreased
Enter your address only if you are filing
the net operating loss. The change in
this form separately. Include the
In figuring the net adjustment to be
the amount of the net operating loss
apartment, suite, room, or other unit
entered in each column on line 2, be
would be carried back or forward to the
number after the street address. If the
sure to take into account any other
appropriate tax year and the
Post Office does not deliver mail to the
income and expense adjustments that
hypothetical tax would be recomputed
street address and you have a P.O. box,
may result from the increase (or
in the carryback/forward year. See
show the box number instead.
decrease) to income from long-term
Regulations section 1.460-6(c)(3)(v).
contracts (for example, a change to
However, the computation period for
Item A—Identifying
adjusted gross income affecting medical
computing interest on NOLs is different.
Number
expenses under section 213). If there
See the exceptions listed on lines 7 and
are no adjustments besides the
8 below.
If you are an individual, enter your social
look-back adjustments, the sum of all
security number. Other filers must use
line 2 amounts should be zero and
Note. The 2-year carryback rule does
their EIN.
reflected in column 2(c). If there are
not apply to net operating losses arising
additional adjustments that result from
in tax years ending after 2017. An
Part I—Regular Method
the application of the look-back, leave
exception applies to farmers and
Use Part I only if you are not electing, do
column 2(c) blank and reflect the
non-life insurance companies. See
not have an election in effect, or are not
amounts in the schedule below as
section 172(b) as amended by P.L.
required to use the simplified marginal
described in item 3.
115-97, section 13302.
impact method as described in the
Lines 4 and 5
instructions for Part II, later.
Include the following on an attached
schedule.
Reduce the tax liability to be entered on
Filing year column
lines 4 and 5 by allowable credits (other
1. Identify each completed
Enter the filing year listed at the top of
than refundable credits, for example,
long-term contract by contract number,
this form.
the credit for taxes withheld on wages,
job name, or any other reasonable
the earned income credit, the credit for
Columns (a) and (b)
method used in your records to identify
federal tax on fuels, etc.), but do not
each contract.
Enter at the top of each column the
take into account any credit carrybacks
2. For each contract, report in
ending month and year for:
to the prior year in computing the
columns for each prior year: (a) the
Each prior tax year in which you were
amount to enter on lines 4 and 5 (other
amount of income previously reported
required to report income from the
than carrybacks that resulted from or
based on estimated contract price and
completed long-term contract(s) and
were adjusted by the redetermination of
costs and (b) the amount of income
Any other tax year affected by such
your income from a long-term contract
allocable to each prior year based on
years.
for look-back purposes). Include on
actual contract price and costs. Total
lines 4 and 5 any taxes (such as
Note. If there were more than 2 prior
the columns for each prior year and
alternative minimum tax for individuals)
years, attach additional Forms 8697 as
show the net adjustment to income from
required to be taken into account in the
needed. On the additional Forms 8697,
long-term contracts.
computation of your tax liability (as
enter your name, identifying number,
3. Identify any other adjustments
originally reported or as redetermined).
and tax year. Complete lines 1 through
that result from a change in income from
Lines 7 and 8
8 (as applicable), but do not enter totals
long-term contracts and show the
in column (c). Enter totals only in
amounts in the columns for the affected
For the increase or decrease in tax for
column (c) of the first Form 8697.
years so that the net adjustment shown
each prior year, interest due or to be
in each column on the attached
refunded must be computed at the
Line 1
schedule agrees with the amounts
applicable interest rate and
Do not reduce taxable income or
shown on line 2.
compounded on a daily basis, generally
increase a loss on line 1 by any
from the due date (not including
carryback of a net operating loss, capital
An owner of an interest in a
extensions) of the return for the prior
loss, or net section 1256 contracts loss,
pass-through entity is not required to
year until the earlier of:
except to the extent that carrybacks
provide the detail listed in 1 and 2 above
The due date (not including
must be taken into account to properly
with respect to prior years. The entity
extensions) of the return for the filing
compute interest under section 460.
should provide the line 2 amounts with
year or
Schedule K-1 or on a separate
The date the return for the filing year
Note. The 2-year carryback rule does
statement for its tax year in which the
is filed and any income tax due for that
not apply to net operating losses arising
contracts are completed or adjusted.
year has been fully paid.
in tax years ending after 2017. An
exception applies to farmers and
Note. Taxpayers reporting line 2
Exceptions:
non-life insurance companies. See
amounts from more than one
The time period for determining
section 172(b) as amended by P.L.
Schedule K-1 (or a similar statement)
interest may be different in cases
115-97, section 13302.
must attach a schedule detailing by
involving loss or credit carrybacks or
entity the net change to income from
carryovers in order to properly reflect
long-term contracts.
the time period during which the
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taxpayer or IRS had use of the
same for the accrual period which is
use the simplified marginal impact
hypothetical underpayment or
generally one year. The applicable
method. Under the simplified method,
overpayment. See Regulations section
interest rates for non-corporate
prior year hypothetical underpayments
1.460-6(c)(4)(ii) and (iii) for additional
taxpayers are shown in
Table 1
(for
or overpayments in tax are figured using
information.
interest accrual periods beginning after
an assumed marginal tax rate, which is
If a net operating loss, capital loss,
Jan. 1, 2008).
generally the highest statutory rate in
net section 1256 contracts loss, or
effect for the prior year under section 1
credit carryback is being increased or
The applicable interest rates for
(for an individual) or section 11 (for a
decreased as a result of the adjustment
corporate taxpayers for the first $10,000
corporation). This method eliminates the
made to net income from long-term
are shown in
Table
2. The applicable
need to refigure your tax liability based
contracts, the interest due or to be
interest rates for corporate taxpayers for
on actual contract price and actual
refunded must be computed on the
amounts in excess of $10,000 are
contract costs each time the look-back
increase or decrease in tax attributable
shown in
Table
3.
method is applied.
to the change to the carryback only from
To elect the simplified marginal
the due date (not including extensions)
Following the conversion of a C
impact method, attach a statement to
of the return for the prior year that
corporation into an S corporation, the
your timely filed income tax return
generated the carryback and not from
look-back method is applied at the entity
(determined with extensions) for the first
the due date of the return for the year in
level (1120S) with respect to contracts
tax year of the election. Indicate on the
entered into prior to the conversion. See
which the carryback was absorbed. See
statement that you are making an
Regulations section 1.460-6(g)(3)(iv).
section 6611(f).
election under Regulations section
For the C corporation years, the
In the case of a decrease in tax on
1.460-6(d) to use the simplified marginal
taxpayer would apply the rates reflected
line 6, if a refund has been allowed for
impact method. Once made, the
in Table 2 for the first $10,000 and apply
any part of the income tax liability shown
election applies to all applications of the
the rates in Table 3 for the amounts in
on line 5 for any year as a result of a net
look-back method in the year of the
excess of $10,000.
operating loss, capital loss, net section
election and all later years, unless the
1256 contracts loss, or credit carryback
Line 9
IRS consents to a revocation of the
to such year, and the amount of the
election.
See
If Interest Is To Be Refunded to
refund exceeds the amount on line 4,
You, earlier, for where to file Form 8697.
interest is allowed on the amount of
Columns (a), (b), and (c)
Additional interest to be refunded for
such excess only until the due date (not
Enter at the top of each column the
periods after the filing date of Form
including extensions) of the return for
ending month and year for each prior
8697, if any, will be computed by the
the year in which the carryback arose.
tax year in which you were required to
IRS and included in your refund. Report
report income from the completed
Note. If a different method of interest
the amount on line 9 (or the amount
long-term contract.
computation must be used to produce
refunded by the IRS if different) as
the correct result in your case, use that
interest income on your income tax
Note. If there were more than 3 prior
method and attach an explanation of
return for the tax year in which it is
tax years, attach additional Forms 8697
how the interest was computed.
received or accrued.
as needed. On the additional Forms
8697, enter your name, identifying
Line 10
Applicable Interest Rates
number, and tax year. Complete lines 1
See
If You Owe Interest
under
Filing
through 9 (as applicable), but do not
The overpayment rate designated under
Instructions, earlier, for how to report
enter totals in column (d). Enter totals
section 6621 is used to calculate the
this amount on your tax return.
only in column (d) of the first Form 8697.
interest for both hypothetical
Corporations (other than S
overpayments and underpayments. The
Line 1
corporations) may deduct this amount
applicable interest rates are published
(or the amount computed by the IRS if
In each column, show a net increase to
quarterly in revenue rulings in the
different) as interest expense for the tax
income as a positive amount and a net
Internal Revenue Bulletin available at
year in which it is paid or incurred. For
decrease to income as a negative
IRS.gov.
individuals and other taxpayers, this
amount.
interest is not deductible.
However, for contracts completed in
On an attached schedule:
tax years ending after August 5, 1997,
Identify each completed long-term
Estimated Tax Penalty
an interest rate is determined for each
contract by contract number, job name,
interest accrual period. The interest
Look-back interest owed is not subject
or any other reasonable method used in
accrual period starts on the day after the
to the estimated tax penalty. See
your records to identify each contract;
return due date (not including
Regulations section 1.460–6(f)(2)(i).
and
extensions) for each prior tax year and
See the instructions for the 2018 Form
For each contract, report in columns
ends on the return due date for the
2210, line 2, for individuals and 2018
for each prior year: (a) the amount of
following tax year. The interest rate in
Form 2220, line 2(b), for corporations.
income previously reported based on
effect for the entire interest accrual
estimated contract price and costs and
period is the overpayment rate
Part II—Simplified
(b) the amount of income allocable to
determined under section 6621(a)(1)
Marginal Impact Method
each prior year based on actual contract
applicable on the first day of the interest
price and costs. Total the columns for
Part II is used only by pass-through
accrual period.
each prior year and show the net
entities required to apply the look-back
adjustment to income from long-term
Even though the interest rates
method at the entity level (see
Who
contracts.
change quarterly, for look-back
Must
File, earlier) and taxpayers
purposes the interest rate stays the
electing (or with an election in effect) to
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