Interest Computation Under the Look-Back Method for Completed Long-Term Contracts
Specific Instructions
All filers must complete the information at the top of the form above Part I according to the following instructions and complete either Part I or Part II as appropriate. Also sign the form at the bottom of page 2 unless you are filing the form with your tax return.
Filing Year
Fill in the filing year line at the top of the form to show the tax year in which the contracts for which this form is being filed were completed or adjusted. If you were an owner of an interest in a pass-through entity that has completed or adjusted one or more contracts, enter your tax year that ends with or includes the end of the entity's tax year in which the contracts were completed or adjusted.
Name
Enter the name shown on your Federal income tax return for the filing year. If you are an individual filing a joint return, also enter your spouse's name as shown on Form 1040.
Address
Enter your address only if you are filing this form separately. Include the apartment, suite, room, or other unit number after the street address. If the Post Office does not deliver mail to the street address and you have a P.O. box, show the box number instead.
Item A - Identifying Number
If you are an individual, enter your social security number. Other filers must use their EIN.
Part I - Regular Method
Use Part I only if you are not electing, do not have an election in effect, or are not required to use the simplified marginal impact method as described in the instructions for Part II on page 4.
Columns (a), (b), and (c)
Enter at the top of each column the ending month and year for:
- Each prior tax year in which you were required to report income from the completed long-term contract(s), and
- Any other tax year affected by such year(s).
Note: If there were more than 3 prior tax years, attach additional Forms 8697 as needed. On the additional Forms 8697, enter your name, identifying number, and tax year. Complete lines 1 through 8 (as applicable), but do not enter totals in column (d). Enter totals only in column (d) of the first Form 8697.
Line 1
Do not reduce taxable income or increase a loss on line 1 by any net operating loss (NOL) carryback or capital loss carryback, unless that NOL carryback or capital loss carryback resulted from or was adjusted by the redetermination of your income from a long-term contract for look-back purposes.
Line 2
In each column, show a net increase to income as a positive amount and a net decrease to income as a negative amount.
In figuring the net adjustment to be entered in each column on line 2, be sure to take into account any other income and expense adjustments that may result from the increase (or decrease) to income from long-term contracts (e.g., a change to adjusted gross income affecting investment expenses under section 212, medical expenses under section 213, etc.; and the deduction for state income taxes by an accrual basis taxpayer).
On an attached schedule:
- Identify each completed long-term contract by contract number, job name, or any other reasonable method used in your records to identify each contract.
- For each contract, report in columns for each prior year: (a) the amount of income previously reported based on estimated contract price and costs, and (b) the amount of income allocable to each prior year based on actual contract price and costs. Total the columns for each prior year and show the net adjustment to income from long-term contracts.
- Identify any other adjustments that result from a change in income from long-term contracts and show the amounts in the columns for the affected years so that the net adjustment shown in each column on the attached schedule agrees with the amounts shown on line 2.
An owner of an interest in a pass-through entity is not required to provide the detail listed in 1 and 2 above with respect to prior years. The entity should provide the line 2 amounts with Schedule K-1 or on a separate statement for its tax year in which the contracts are completed or adjusted.
Note: Taxpayers reporting line 2 amounts from more than one Schedule K-1 (or a similar statement) must attach a schedule detailing by entity the net change to income from long-term contracts.
Lines 4 and 5
Reduce the tax liability to be entered on lines 4 and 5 by allowable credits (other than refundable credits, e.g., the credit for taxes withheld on wages, the earned income credit, the credit for Federal tax on fuels, etc.), but do not take into account any credit carrybacks to the prior year in computing the amount to enter on lines 4 and 5 (other than carrybacks that resulted from or were adjusted by the redetermination of your income from a long-term contract for look-back purposes). Include on lines 4 and 5 any taxes (such as alternative minimum tax) required to be taken into account in the computation of your tax liability (as originally reported or as redetermined).
Lines 7 and 8
For the increase (or decrease) in tax for each prior year, interest due or to be refunded must be computed at the adjusted overpayment rate determined under section 460(b)(7) and compounded on a daily basis, generally from the due date (not including extensions) of the return for the prior year until the earlier of:
- The due date (not including extensions) of the return for the filing year, or
- The date the return for the filing year is filed and any income tax due for that year has been fully paid.
Note: For contracts completed in tax years ending before August 6, 1997, use the overpayment rate determined under section 6621(a)(1) instead of the adjusted overpayment rate determined under section 460(b)(7).
Exceptions:
- If a net operating loss, capital loss, or credit carryback is being increased or decreased as a result of the adjustment made to net income from long-term contracts, the interest due or to be refunded must be computed on the increase or decrease in tax attributable to the change to the carryback only from the due date (not including extensions) of the return for the prior year that generated the carryback and not from the due date of the return for the year in which the carryback was absorbed. See section 6611(f).
- In the case of a decrease in tax on line 6, if a refund has been allowed for any part of the income tax liability shown on line 5 for any year as a result of a net operating loss, capital loss, or credit carryback to such year, and the amount of the refund exceeds the amount on line 4, interest is allowed on the amount of such excess only until the due date (not including extensions) of the return for the year in which the carryback arose.
Note: If a different method of interest computation must be used to produce the correct result in your case, use that method and attach an explanation of how the interest was computed.
Tables of interest factors to compute daily compound interest were published in Rev. Proc. 95-17, 1995-1 C.B. 556. The annual interest rate in effect and the table and corresponding page number in 1995-1 C.B. for periods through June 30, 1998, are shown in the tables on this page.
Contracts Completed in Tax Years Ending Before August 6, 1997
Generally, for contracts completed in tax years ending before August 6, 1997, use Table 1 to figure the interest on increases or decreases in tax for each period shown. However, use Table 2 to figure the interest for periods after 1994 on the portion of any corporate increase or decrease in tax exceeding $10,000. (Use Table 1 to figure the interest on the first $10,000 of tax.)
Contracts Completed in Tax Years Ending After August 5, 1997
For contracts completed in tax years ending after August 5, 1997, an interest rate is determined for each interest accrual period. The interest accrual period starts on the day after the return due date (not including extensions) for each prior tax year and ends on the return due date for the following tax year. The interest rate in effect for the entire interest accrual period is the overpayment rate determined under section 6621(a)(1) for the calendar quarter in which the interest accrual period begins. Generally, use Table 1 to figure the interest for each interest accrual period that began during the applicable period shown in the table. However, use Table 2 to figure the interest on the portion of any corporate increase or decrease in tax exceeding $10,000 for each interest accrual period after 1994 that began during the applicable period shown in the table. (Use Table 1 to figure the interest on the first $10,000 of tax.)
General Interest Rates
| From |
Through |
Rate |
Table |
Page |
|
From |
Through |
Rate |
Table |
Page |
| - |
6/30/86 |
10% |
25 |
579 |
|
7/1/92 |
9/30/92 |
7% |
67 |
621 |
| 7/1/86 |
12/31/86 |
9% |
23 |
577 |
|
10/1/92 |
12/31/92 |
6% |
65 |
619 |
| 1/1/87 |
3/31/87 |
8% |
21 |
575 |
|
1/1/93 |
3/31/93 |
6% |
17 |
571 |
| 4/1/87 |
6/30/87 |
8% |
21 |
575 |
|
4/1/93 |
6/30/93 |
6% |
17 |
571 |
| 7/1/87 |
9/30/87 |
8% |
21 |
575 |
|
7/1/93 |
9/30/93 |
6% |
17 |
571 |
| 10/1/87 |
12/31/87 |
9% |
23 |
577 |
|
10/1/93 |
12/31/93 |
6% |
17 |
571 |
| 1/1/88 |
3/31/88 |
10% |
73 |
627 |
|
1/1/94 |
3/31/94 |
6% |
17 |
571 |
| 4/1/88 |
6/30/88 |
9% |
71 |
625 |
|
4/1/94 |
6/30/94 |
6% |
17 |
571 |
| 7/1/88 |
9/30/88 |
9% |
71 |
625 |
|
7/1/94 |
9/30/94 |
7% |
19 |
573 |
| 10/1/88 |
12/31/88 |
10% |
73 |
627 |
|
10/1/94 |
12/31/94 |
8% |
21 |
575 |
| 1/1/89 |
3/31/89 |
10% |
25 |
579 |
|
1/1/95 |
3/31/95 |
8% |
21 |
575 |
| 4/1/89 |
6/30/89 |
11% |
27 |
581 |
|
4/1/95 |
6/30/95 |
9% |
23 |
577 |
| 7/1/89 |
9/30/89 |
11% |
27 |
581 |
|
7/1/95 |
9/30/95 |
8% |
21 |
575 |
| 10/1/89 |
12/31/89 |
10% |
25 |
579 |
|
10/1/95 |
12/31/95 |
8% |
21 |
575 |
| 1/1/90 |
3/31/90 |
10% |
25 |
579 |
|
1/1/96 |
3/31/96 |
8% |
69 |
623 |
| 4/1/90 |
6/30/90 |
10% |
25 |
579 |
|
4/1/96 |
6/30/96 |
7% |
67 |
621 |
| 7/1/90 |
9/30/90 |
10% |
25 |
579 |
|
7/1/96 |
9/30/96 |
8% |
69 |
623 |
| 10/1/90 |
12/31/90 |
10% |
25 |
579 |
|
10/1/96 |
12/31/96 |
8% |
69 |
623 |
| 1/1/91 |
3/31/91 |
10% |
25 |
579 |
|
1/1/97 |
3/31/97 |
8% |
21 |
575 |
| 4/1/91 |
6/30/91 |
9% |
23 |
577 |
|
4/1/97 |
6/30/97 |
8% |
21 |
575 |
| 7/1/91 |
9/30/91 |
9% |
23 |
577 |
|
7/1/97 |
9/30/97 |
8% |
21 |
575 |
| 10/1/91 |
12/31/91 |
9% |
23 |
577 |
|
10/1/97 |
12/31/97 |
8% |
21 |
575 |
| 1/1/92 |
3/31/92 |
8% |
69 |
623 |
|
1/1/98 |
3/31/98 |
8% |
21 |
575 |
| 4/1/92 |
6/30/92 |
7% |
67 |
621 |
|
4/1/98 |
6/30/98 |
7% |
19 |
573 |
Interest Rates for Corporate Increases or Decreases in Tax Exceeding $10,000
| From |
Through |
Rate |
Table |
Page |
| 1/1/95 |
3/31/95 |
6.5% |
18 |
572 |
| 4/1/95 |
6/30/95 |
7.5% |
20 |
574 |
| 7/1/95 |
9/30/95 |
6.5% |
18 |
572 |
| 10/1/95 |
12/31/95 |
6.5% |
18 |
572 |
| 1/1/96 |
3/31/96 |
6.5% |
66 |
620 |
| 4/1/96 |
6/30/96 |
5.5% |
64 |
618 |
| 7/1/96 |
9/30/96 |
6.5% |
66 |
620 |
| 10/1/96 |
12/31/96 |
6.5% |
66 |
620 |
| 1/1/97 |
3/31/97 |
6.5% |
18 |
572 |
| 4/1/97 |
6/30/97 |
6.5% |
18 |
572 |
| 7/1/97 |
9/30/97 |
6.5% |
18 |
572 |
| 10/1/97 |
12/31/97 |
6.5% |
18 |
572 |
| 1/1/98 |
3/31/98 |
6.5% |
18 |
572 |
| 4/1/98 |
6/30/98 |
5.5% |
16 |
570 |
For periods beginning after June 30, 1998, use the overpayment rate under section 6621(a)(1) in the revenue rulings published quarterly in the Internal Revenue Bulletin.
Line 9
Additional interest to be refunded for periods after the due date of the return, if any, will be computed by the IRS and included in your refund. Report the amount on line 9 (or the amount refunded by the IRS if different) as interest income on your income tax return for the tax year in which it is received or accrued.
Line 10
Corporations (other than S corporations) may deduct this amount (or the amount computed by the IRS if different) as interest expense for the tax year in which it is paid or incurred. For individuals and other taxpayers, this interest is not deductible.
Part II - Simplified Marginal Impact Method
Part II is used only by pass-through entities required to apply the look-back method at the entity level (see Who Must File on page 1) and taxpayers electing (or with an election in effect) to use the simplified marginal impact method. Under the simplified method, prior year hypothetical underpayments or overpayments in tax are figured using an assumed marginal tax rate, which is generally the highest statutory rate in effect for the prior year under section 1 (for an individual) or section 11 (for a corporation). This method eliminates the need to refigure your tax liability based on actual contract price and actual contract costs each time the look-back method is applied.
To elect the simplified marginal impact method, attach a statement to your timely filed income tax return (determined with extensions) for the first tax year of the election. Indicate on the statement that you are making an election under Regulations section 1.460-6(d) to use the simplified marginal impact method. Once made, the election applies to all applications of the look-back method in the year of the election and all later years, unless the IRS consents to a revocation of the election.
Columns (a), (b), and (c)
Enter at the top of each column the ending month and year for each prior tax year in which you were required to report income from the completed long-term contract.
Note: If there were more than 3 prior tax years, attach additional Forms 8697 as needed. On the additional Forms 8697, enter your name, identifying number, and tax year. Complete lines 1 through 9 (as applicable), but do not enter totals in column (d). Enter totals only in column (d) of the first Form 8697.
Line 1
In each column, show a net increase to income as a positive amount and a net decrease to income as a negative amount.
On an attached schedule:
- Identify each completed long-term contract by contract number, job name, or any other reasonable method used in your records to identify each contract.
- For each contract, report in columns for each prior year: (a) the amount of income previously reported based on estimated contract price and costs, and (b) the amount of income allocable to each prior year based on actual contract price and costs. Total the columns for each prior year and show the net adjustment to income from long-term contracts.
An owner of an interest in a pass-through entity is not required to provide the detail listed in (a) and (b) above for prior years. The entity should provide the line 1 amounts with Schedule K-1 or on a separate statement for its tax year in which the contracts are completed or adjusted.
Note: Taxpayers reporting line 1 amounts from more than one Schedule K-1 (or a similar statement) must attach a schedule detailing by entity the net change to income from long-term contracts.
Line 2
Multiply the amount on line 1 by the applicable regular tax rate for each prior year shown in column (a), (b), or (c). The applicable regular tax rate is as follows:
1. Individuals and pass-through entities in which, at all times during the year, more than 50% of the interests in the entity are held by individuals directly or through other pass-through entities:
| a. Tax years beginning before 1987 |
50% |
| b. Tax years beginning in 1987 |
38.5% |
| c. Tax years beginning after 1987 and before
1991 |
28% |
| d. Tax years beginning after 1990 and before
1993 |
31% |
| e. Tax years beginning after 1992 |
39.6% |
2. Corporations (other than S corporations) and pass-through entities not included in 1 above:
| a. Tax years ending before July 1, 1987 |
46% |
| b. For tax years beginning before July 1,
1987, that include July 1, 1987, the rate is 34% plus the following: |
|
Number of days in tax year before 7/1/87
------------------------------------------ × 12%
Number of days in tax year
| c. Tax years beginning after June 30, 1987,
and ending before 1993 |
34% |
| d. For tax years beginning before 1993 that
include January 1, 1993, the rate is 34% plus the following: |
|
Number of days in tax year after 12/31/92
------------------------------------------- × 1%
Number of days in tax year
| e. Tax years beginning after 1992 |
35% |
Line 3
See the instructions for Part II, line 1, on this page and complete line 3 in the same manner, using only income and deductions allowed for alternative minimum tax (AMT) purposes.
Line 4
Multiply the amount on line 3 by the applicable AMT rate, which is as follows:
1. Individuals and pass-through entities in which, at all times during the year, more than 50% of the interests in the entity are held by individuals directly or through other pass-through entities:
| a. Tax years beginning after 1986 and before
1991 |
21% |
| b. Tax years beginning after 1990 and before
1993 |
24% |
| c. Tax years beginning after 1992 |
28% |
2. Corporations (other than S corporations) and pass-through
| entities not included in 1 above |
20% |
Line 5
If both lines 2 and 4 are negative, enter whichever amount is greater. Treat both numbers as positive when making this comparison, but enter the amount as a negative number. (If the amount on one line is negative, but the amount on the other line is positive, enter the positive amount.)
Lines 8 and 9
For the increase (or decrease) in tax for each prior year, interest due or to be refunded must be computed at the adjusted overpayment rate determined under section 460(b)(7) and compounded on a daily basis from the due date (not including extensions) of the return for the prior year until the earlier of:
- The due date (not including extensions) of the return for the filing year, or
- The date the return for the filing year is filed and any income tax due for that year has been fully paid.
Note: For contracts completed in tax years ending before August 6, 1997, use the overpayment rate determined under section 6621(a)(1) instead of the adjusted overpayment rate determined under section 460(b)(7).
Tables of interest factors to compute daily compound interest were published in Rev. Proc. 95-17, 1995-1 C.B. 556. The annual interest rate in effect and the table and corresponding page number in 1995-1 C.B. for periods through June 30, 1998, are shown in the tables in the instructions on page 3 for Part I, lines 7 and 8.
Line 10
See the instructions on page 4 for Part I, line 9.
Line 11
See the instructions on page 4 for Part I, line 10.
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