Rather than revise estimates to complete when estimates of total contract costs change, the government now a new method called the look back method.  Now actual contract price and costs, rather than revised estimates on contract price and costs, may be used on all years prior to completion year and any additional tax or tax refund that would have been due in the earlier years is subject to an interest payment by the taxpayer or government at the prevailing government rate for overpayments.

As an illustration: assume $200,000 was incurred the first year of a $1 million contract expected to have a cost of $800,000 then $250,000 ($200,000/$800,000 or 25% of $1 million) was declared as income.  If actually costs are $600,000  then $333,333 of income should have been claimed the first year ($200,000/$600,000 or 33% of $1 million).  Then the contractor would owe interest on the higher income of $83,333 ($333,000-$250,000) for the first year as well as any other years the income was understated.

Recent changes have lessened the impact: (1) for partnerships and S corporations the look back method does not apply.  When contracts are completed within two years and the contract gross price either does not exceed the lesser of $1 million or 1 percent of the contractor’s average gross receipts for the past three tax years or (2) the taxpayer may elect not to apply the look-back method if the income (loss) reported each year of the long-term contract period is within 10% of the recomputed income for each year or the total reported income for the entire completed contract is within 10% of the recomputed income.  

{TAG_FORM_TITLE}