Specific Instructions

All filers must complete the information at the top of the form above Part I according to the following instructions. Then, complete either Part I or Part II as appropriate. Also sign the form at the bottom of page 2 if interest is to be refunded to you. A signature is not required if 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 in a post-completion year. 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, later.

Filing year column

Enter the filing year listed at the top of this form.

Columns (a) and (b)

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 years.

Note.

If there were more than 2 prior 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 (c). Enter totals only in column (c) of the first Form 8697.

Line 1

Do not reduce taxable income or increase a loss on line 1 by any carryback of a net operating loss, capital loss, or net section 1256 contracts loss, except to the extent that carrybacks must be taken into account to properly compute interest under section 460.

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 (for example, a change to adjusted gross income affecting medical expenses under section 213). If there are no adjustments besides the look-back adjustments, the sum of all line 2 amounts should be zero and reflected in column 2(c). If there are additional adjustments that result from the application of the look-back, leave column 2(c) blank and reflect the amounts in the schedule below as described in item 3.

Include the following on an attached schedule.

  1. Identify each completed long-term contract by contract number, job name, or any other reasonable method used in your records to identify each contract.

  2. 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.

  3. 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.

Line 3

If line 3 results in a negative amount, it represents a look-back net operating loss (NOL). The adjustment in line 2 either created, increased, or decreased the net operating loss. The change in the amount of the net operating loss would be carried back or forward to the appropriate tax year and the hypothetical tax would be recomputed in the carryback/forward year. See Regulations section 1.460-6(c)(3)(v). However, the computation period for computing interest on NOLs is different. See the exceptions listed on lines 7 and 8 below.

Lines 4 and 5

Reduce the tax liability to be entered on lines 4 and 5 by allowable credits (other than refundable credits, for example, 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 applicable interest rate 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.

Exceptions:   
  • The time period for determining interest may be different in cases involving loss or credit carrybacks or carryovers in order to properly reflect the time period during which the taxpayer or IRS had use of the hypothetical underpayment or overpayment. See Regulations section 1.460-6(c)(4)(ii) and (iii) for additional information.

  • If a net operating loss, capital loss, net section 1256 contracts 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, net section 1256 contracts 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.

Applicable Interest Rates

The overpayment rate designated under section 6621 is used to calculate the interest for both hypothetical overpayments and underpayments. The applicable interest rates are published quarterly in revenue rulings in the Internal Revenue Bulletin available at www.irs.gov.

However, 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) applicable on the first day of the interest accrual period.

Even though the interest rates change quarterly, for look-back purposes the interest rate stays the same for the accrual period which is generally one year. The applicable interest rates for non-corporate taxpayers are shown in Table 1 (for interest accrual periods beginning after Jan. 1, 2004).

The applicable interest rates for corporate taxpayers for the first $10,000 are shown in Table 2. The applicable interest rates for corporate taxpayers for amounts in excess of $10,000 are shown in Table 3.

Following the conversion of a C corporation into an S corporation, the look-back method is applied at the entity level (1120S) with respect to contracts entered into prior to the conversion. See Regulations section 1.460-6(g)(3)(iv). For the C corporation years, the taxpayer would apply the rates reflected in Table 2 for the first $10,000 and apply the rates in Table 3 for the amounts in excess of $10,000.

Line 9

See If Interest Is To Be Refunded to You, earlier, for where to file Form 8697. Additional interest to be refunded for periods after the filing date of Form 8697, 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

See If You Owe Interest under Filing Instructions, earlier, for how to report this amount on your tax return. 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.

Estimated Tax Penalty

Look-back interest owed is not subject to the estimated tax penalty. See Regulations section 1.460–6(f)(2)(i). See the instructions for the 2012 Form 2210, line 2 for individuals and 2012 Form 2220, line 2(b) for corporations.

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, earlier) 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; and

  • 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 detailed schedule listed 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 in 1988, 1989, or 1990 28%
d. Tax years beginning in 1991 or 1992 31%
e. Tax years beginning in 1993 through 2000 39.6%
f. Tax years beginning in 2001 39.1%
g. Tax years beginning in 2002 38.6%
h. Tax years beginning in 2003 through 2012 35%
i. Tax years beginning in 2013 or later 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

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

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 in 1987 through 1990 21%
b. Tax years beginning in 1991 or 1992 24%
c. Tax years beginning in 1993 or later 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 applicable interest rate 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.

See Applicable Interest Rates in the instructions for Part I, lines 7 and 8, earlier.

Line 10

See the instructions for Part I, line 9, earlier.

Line 11

See the instructions for Part I, line 10, earlier.

Table 1 
Interest Rates for Non-corporate Taxpayers

From Through Rate Table Page    
1/1/04 3/31/04 4% 61 615    
4/1/04 6/30/04 5% 63 617    
7/1/04 9/30/04 4% 61 615    
10/1/04 12/31/04 5% 63 617    
1/1/05 3/31/05 5% 15 569    
4/1/05 9/30/05 6% 17 571    
10/1/05 6/30/06 7% 19 573    
7/1/06 12/31/07 8% 21 575    
1/1/08 3/31/08 7% 67 621    
4/1/08 6/30/08 6% 65 619    
7/1/08 9/30/08 5% 63 617    
10/1/08 12/31/08 6% 65 619    
1/1/09 3/31/09 5% 15 569    
4/1/09 12/31/10 4% 13 567    
1/1/11 3/31/11 3% 11 565    
4/1/11 9/30/11 4% 13 567    
10/1/11 12/31/11 3% 11 565    
1/1/12 12/31/12 3% 59 613    
1/1/13 9/30/13 3% 11 565    

Table 2 
Interest Rates for Corporate 
Increases or Decreases in Tax 
of $10,000 or Less

From Through Rate Table Page    
1/1/04 3/31/04 3% 59 613    
4/1/04 6/30/04 4% 61 615    
7/1/04 9/30/04 3% 59 613    
10/1/04 12/31/04 4% 61 615    
1/1/05 3/31/05 4% 13 567    
4/1/05 9/30/05 5% 15 569    
10/1/05 6/30/06 6% 17 571    
7/1/06 12/31/07 7% 19 573    
1/1/08 3/31/08 6% 65 619    
4/1/08 6/30/08 5% 63 617    
7/1/08 9/30/08 4% 61 615    
10/1/08 12/31/08 5% 63 617    
1/1/09 3/31/09 4% 13 567    
4/1/09 12/31/10 3% 11 565    
1/1/11 3/31/11 2% 9 563    
4/1/11 9/30/11 3% 11 565    
10/1/11 12/31/11 2% 9 563    
1/1/12 12/31/12 2% 57 611    
1/1/13 9/30/13 2% 9 563    

Table 3 
Interest Rates for Corporate 
Increases or Decreases in Tax 
Exceeding $10,000

From Through Rate Table Page    
1/1/04 3/31/04 1.5% 56 610    
4/1/04 6/30/04 2.5% 58 612    
7/1/04 9/30/04 1.5% 56 610    
10/1/04 3/31/05 2.5% 58 612    
4/1/05 9/30/05 3.5% 12 566    
10/1/05 6/30/06 4.5% 14 568    
7/1/06 12/31/07 5.5% 16 570    
1/1/08 3/31/08 4.5% 62 616    
4/1/08 6/30/08 3.5% 60 614    
7/1/08 9/30/08 2.5% 58 612    
10/1/08 12/31/08 3.5% 60 614    
1/1/09 3/31/09 2.5% 10 564    
4/1/09 12/31/10 1.5% 8 562    
1/1/11 3/31/11 .5%    
4/1/11 9/30/11 1.5% 8 562    
10/1/11 9/30/13 .5%    

Example of Applicable Interest Rates for Look-back Interest.    
A C Corporation taxpayer completed contracts subject to look-back interest during the 2010 calendar year. The contracts were started in 2008, so 2008 and 2009 are redetermination years. The corporate tax return due date, without extensions, for all years is March 15.

  For computing look-back interest, the interest rates and accrual period for the 2008 redetermination year would be:
  • 3/16/2009 – 3/15/2010: 4% for the 1st $10,000 (2.5% for any amount exceeding $10,000).

  • 3/16/2010 – 3/15/2011: 3% for the 1st $10,000 (1.5% for any amount exceeding $10,000).

  The interest rate and accrual period for the 2009 redetermination year would be:
  • 3/16/2010 – 3/15/2011: 3% for the 1st $10,000 (1.5% for any amount exceeding $10,000).


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