Special Rules for Long-Term Contracts Under Section 460

Internal Revenue Code (IRC) section 1.460 provides rules for determining whether a contract for the manufacture, building, installation, or construction of property is a long-term contract under section 460 and what activities must be accounted for as a single long-term contract. Specific rules for long-term manufacturing and construction contracts are provided in §§ 1.460-2 and 1.460-3, respectively. A taxpayer generally must determine the income from a long-term contract using the percentage-of-completion method described in § 1.460-4(b) (PCM) and the cost allocation rules described in § 1.460-5(b) or (c). In addition, after a contract subject to the PCM is completed, a taxpayer generally must apply the look-back method described in § 1.460-6 to determine the amount of interest owed on any hypothetical underpayment of tax, or earned on any hypothetical overpayment of tax, attributable to accounting for the long-term contract under the PCM. TD 8929 requires that information be collected in order to notify the Commissioner of a taxpayer's decision to sever or aggregate one or more long- term contracts under the regulations. The statement is needed so the Commissioner can determine whether the taxpayer properly severed or aggregated its contract(s). The regulations affect any taxpayer that manufactures or constructs property under long-term contracts. TD 8775 and requires taxpayers to attach a notification statement to their returns when they make the election and TD 8995 is required to enable taxpayers to make look-back computations when the income from a long-term contract has been previously reported by another taxpayer.

The latest form for Special Rules for Long-Term Contracts Under Section 460 expires 2023-03-31 and can be found here.

TD 8995 - Mid-Contract Change in Taxpayer

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