Old Jack - Are you lurking on the board?

[BulldogTom]

Jack,

You seem to know the most about construction taxation. Do you know what the "lookback" rule is, and what the mechanics of using it for a taxpayer who has used a combination of Percentage of Completion and Completed Contract methods for the corporate tax return.

A little background. Taxpayer uses % of completion method of accounting for all work on their books and records. Do not qualify as a small contractor. Average 20MM+ in reciepts over the last 5 years. But they do residential work. On the tax returns for the last 5 years, the CPA Tax Preparer has used a hybrid of POC for the commercial work and Completed Contract for the residential work. It appears this is allowed under the code, but I am still searching for the exact code that allows it.

In my research, it seems that when a contractor uses % of Completion on their tax return, they need to do a "lookback" to make sure they did not over/under estimate their costs when determining the POC subject to taxation. If there is an over estimate of costs, then the taxpayer owes interest on the tax that should have been paid in the prior year, and if there is an under estimate of cost, the taxpayer is entitled to interest on the amount of tax they paid that should not have. At least that appears to be how it works. Do I have that right?

How / on what form would you see the lookback rule on the tax return? How does one indicate these amount of interest to pay or have refunded under the lookback rules? Are there exceptions that would exclude a taxpayer from being subject to this rule? Should there be some schedule attached to the return showing the calculation?

Lots of questions, so little time.

Thanks in advance if you can help me understand this a little better.

Tom

Hollister, CA

[kcjenkins]

Tom, have you looked at the Audit Guide for this? I find the Audit guides useful when dealing with odd situations.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Construction-Industry-Audit-Technique-Guide-(ATG)-Chapter-5

The form is 8697

http://apps.irs.gov/app/picklist/list/formsPublications.html;jsessionid=0ws7C9Ndb3NOxf73+YLoLA__?value=8697&criteria=formNumber&submitSearch=Find

Exception for Certain Construction Contracts

The look-back method does not apply to the regular taxable income from:

• Any home construction contract (as defined in section 460(e)(6)(A)) or

• Any other construction contract entered into by a taxpayer: (a) who estimates the contract will be completed within 2 years from the date the contract begins and (b ) whose average annual gross receipts for the 3 tax years preceding the tax year in which the contract is entered into do not exceed $10 million. See section 460(e).

However, the look-back method does apply to the alternative minimum taxable income from any such contract that is not a home construction contract and, therefore, must be accounted for using the percentage of completion method for alternative minimum tax purposes. See section 56(a)(3) for details.

Small Contract Exception

The look-back method does not apply to any contract completed within 2 years of the contract start date if the gross price of the contract (as of contract completion) does not exceed the smaller of:

• $1 million or

• 1% of the taxpayer's average annual gross receipts for the 3 tax years before the tax year of contract completion.

See section 460( b )(3)( B ) for details.

[OldJack]

I think KC has answered your question. And it appears the CPA knows what he is doing.

[BulldogTom]

Thanks to both of you.

Tom

Hollister, CA

[kcjenkins]

Glad to help.

[BulldogTom]

Just and update. The CPA called today and said that "there appear to be some errors in the tax return and he will be making the corrections at no charge." Thanks to both of you for helping me understand what I was supposed to see on the return and where to ask the good questions.

Tom

Hollister, CA

[kcjenkins]

That is good. And the CPA will respect you more now, too. Always a plus.