The Internal Revenue Service (IRS) estimates that 71% of taxpayers required to file and compute look-back do not. Construction is the most prevalent industry where look-back applies, and we want to make sure your company is familiar with look-back requirements to properly report to the IRS.

What is look-back?

The look-back provision was created to address the deferral of revenue recognition from one tax year to a subsequent tax year through the Percentage of Completion (POC) method. Look-back is performed on a contract by contract basis at the completion of certain long-term contracts, once the final contract gross profit is determined. The look-back calculation retrospectively compares the estimated revenues recognized in the prior years of the contract to the revenues that should have been recognized in those prior years based upon the final contract amounts. Interest due to, or refunded from, the IRS is then calculated based on the difference between the tax liability previously reported as compared to retrospectively calculated tax liability.

Who has to calculate look-back?

The most common industry to be subject to look-back is the construction industry. Generally, any taxpayer required to compute taxable income from long-term contracts utilizing POC is required to compute look-back upon the completion of those projects. However, exceptions and/or elections exists for small construction contracts, home construction contracts, and residential construction contracts.

Where is the interest from look-back presented?

Look-back interest is calculated at the partner or shareholder level for pass-through entities or at the entity level for a C corporation.  Even though the look-back is calculated and may affect numerous previous year tax returns, you do not need to amend the returns but instead calculate the interest due/from the IRS on Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts.

These are the basic principles of look-back. For additional information or planning ideas to minimize your look-back interest, please contact your local Blue & Co representative.