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L. 101-239, 103 Stat. 2106, 100 percent of contract items for
long-term contracts entered into on or after July 11, 1989, had
to be reported under the percentage of completion method.
Under the percentage of completion method of accounting,
income from the contract must be reported over the life of the
contract, and expenses must be deducted in the year incurred.
The reportable income for each year is calculated as follows:
the total contract costs incurred through the end of the tax year
are divided by the total estimated contract costs, and then
multiplied by the total contract price; the product of this
multiplication is reduced by gross income from the contract
reported for prior years. See sec. 460; Cameron v. Commissioner,
105 T.C. 380 (1995), affd. sub nom. Broadway v. Commissioner, 111
F.3d 593 (6th Cir. 1997).
Under section 460(b), a taxpayer is required to apply the
“look-back method” upon a contract’s completion (and possibly
again after a postcompletion event) to compensate the prejudiced
party (taxpayer or Government) for a taxpayer’s overestimation or
underestimation in applying the percentage of the completion
method. Under this method, the taxpayer recomputes its income
tax (theoretically--since, in reality, taxpayers do not amend any
tax returns) for each year of the contract using the actual
contract price and costs instead of estimates. Based on this
reconciliation, the taxpayer pays interest to the Government on
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Last modified: May 25, 2011