Cases: Koch Industries, Inc. v. United States, 603 F.3d 816 (10th Cir. 2010); Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367 (1995); Shea Homes, Inc. & Subsidiaries v. Commissioner, 834 F.3d 1061 (9th Cir. 2016)
Forms: Form 8697; Form 1065; Form 3115; Form W-2
Final rules 6
(a) Requirement that percentage of completion method be used In the case of any long-term contract, the taxable income from such contract shall be determined under the percentage of completion method (as modified by subsection (b)).
Amended 1987, 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(a), substituted “Requirement that percentage of completion method be used” for “Percentage of completion-capitalized cost method” in heading and amended text generally. Prior to amendment, text read as follows:
- 1989 “(1) In general.—In the case of any long-term contract—
“(A) 90 percent of the items with respect to such contract shall be taken into account under the percentage of completion method (as modified by subsection (b)), and
“(B) 10 percent of the items with respect to such contract shall be taken into account under the taxpayer’s normal method of accounting.
- 1989 “(2) 90 percent look-back method to apply.—Upon completion of any long-term contract (or, with respect to any amount properly taken into account after completion of the contract, when such amount is so properly taken into account), the taxpayer shall pay (or shall be entitled to receive) interest determined by applying the look-back method of subsection (b)(3) to 90 percent of the items with respect to the contract.”
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(e)(1), inserted “(or, with respect to any amount properly taken into account after completion of the contract, when such amount is so properly taken into account)” after “any long-term contract”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 5041(a)(1), substituted “90” for “70”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 5041(a)(2), substituted “10” for “30”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 5041(a)(1), substituted “90” for “70” in heading and in text.
- 1987 Pub. L. 100-203 Pub. L. 100–203 substituted “70 percent” for “40 percent” in par. (1)(A) and in heading and text of par. (2), and “30 percent” for “60 percent” in par. (1)(B).
Cited by 3
(b) Percentage of completion method
Cited by 9
(1) Requirements of percentage of completion method Except as provided in paragraph (3), in the case of any long-term contract with respect to which the percentage of completion method is used—
Amended 1989, 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1704(t)(28), which directed that par. (1) be amended by substituting “the look-back method of paragraph (2)” for “the look-back method of paragraph (3)”, could not be executed, because that phrase does not appear in text. See 1989 Amendment note below.
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(2)(A), substituted “paragraph (3)” for “paragraph (4)”.
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(2)(B), which directed the amendment of par. (1) by substituting “paragraph (2)” for “paragraph (3)”, was executed by making the substitution in subpar. (B) and concluding provisions to reflect the probable intent of Congress.
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(1), redesignated par. (2) as (1) and struck out former par. (1) which read as follows: “Subsection (a) not to apply where percentage of completion method used.—Subsection (a) shall not apply to any long-term contract with respect to which amounts includible in gross income are determined under the percentage of completion method.”
Cited by 4
(A) the percentage of completion shall be determined by comparing costs allocated to the contract under subsection (c) and incurred before the close of the taxable year with the estimated total contract costs, and
Cited by 2
(B) upon completion of the contract (or, with respect to any amount properly taken into account after completion of the contract, when such amount is so properly taken into account), the taxpayer shall pay (or shall be entitled to receive) interest computed under the look-back method of paragraph (2).
Cited by 5
In the case of any long-term contract with respect to which the percentage of completion method is used, except for purposes of applying the look-back method of paragraph (2), any income under the contract (to the extent not previously includible in gross income) shall be included in gross income for the taxable year following the taxable year in which the contract was completed. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under subparagraph (B) shall be treated as an increase in the tax imposed by this chapter for the taxable year in which the contract is completed (or, in the case of interest payable with respect to any amount properly taken into account after completion of the contract, for the taxable year in which the amount is so properly taken into account).
(2) Look-back method The interest computed under the look-back method of this paragraph shall be determined by—
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(1), redesignated par. (3) as (2). Former par. (2) redesignated (1).
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(e)(4), (6), inserted two sentences at end.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(c)(2)(B), substituted “Except as provided in paragraph (4), in” for “In”.
Cited by 6
(A) first, allocating income under the contract among taxable years before the year in which the contract is completed on the basis of the actual contract price and costs instead of the estimated contract price and costs,
Amended 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141 inserted comma after “first”.
Cited by 3
(B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each taxable year referred to in subparagraph (A) which would result solely from the application of subparagraph (A), and
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(e)(2), substituted “any amount properly taken into account” for “any amount received or accrued” and “is so properly taken into account” for “is so received or accrued”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(c)(4)(B), inserted “(or, with respect to any amount received or accrued after completion of the contract, when such amount is so received or accrued)” after “contract”.
Cited by 2
(C) then using the adjusted overpayment rate (as defined in paragraph (7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).
Amended 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1211(b)(1), substituted “the adjusted overpayment rate (as defined in paragraph (7))” for “the overpayment rate established by section 6621”.
For purposes of the preceding sentence, any amount properly taken into account after completion of the contract shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such amount was properly taken into account) such amount to its value as of the completion of the contract. The taxpayer may elect with respect to any contract to have the preceding sentence not apply to such contract.
(3) Special rules
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(1), redesignated par. (4) as (3). Former par. (3) redesignated (2).
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(e)(3), in concluding provisions, substituted “any amount properly taken into account” for “any amount received or accrued” and “such amount was properly taken into account” for “such amount was received or accrued”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(c)(4)(A), inserted at end “For purposes of the preceding sentence, any amount received or accrued after completion of the contract shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such amount was received or accrued) such amount to its value as of the completion of the contract. The taxpayer may elect with respect to any contract to have the preceding sentence not apply to such contract.”
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(c)(1)(A), substituted “paragraph” for “subparagraph”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(c)(1)(C), substituted “subparagraph (B)” for “paragraph (1)”.
Cited by 3
(A) Simplified method of cost allocation In the case of any long-term contract, the Secretary may prescribe a simplified procedure for allocation of costs to such contract in lieu of the method of allocation under subsection (c).
Cited by 2
(B) Look-back method not to apply to certain contracts Paragraph (1)(B) shall not apply to any contract—
(i) the gross price of which (as of the completion of the contract) does not exceed the lesser of—
(I) $1,000,000, or
(II) 1 percent of the average annual gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the contract was completed, and
(ii) which is completed within 2 years of the contract commencement date.
For purposes of this subparagraph, rules similar to the rules of subsections (e)(2) and (f)(3) shall apply.
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(3), substituted “Paragraph (1)(B)” for “Paragraph (2)(B) and subsection (a)(2)” in introductory provisions.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(c)(1)(B), substituted “subparagraph (A)” for “paragraph (1)” in two places.
Cited by 1
(4) Simplified look-back method for pass-thru entities
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(1), redesignated par. (5) as (4). Former par. (4) redesignated (3).
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(c)(2)(A), added par. (4).
Cited by 2
(A) In general In the case of a pass-thru entity—
(i) the look-back method of paragraph (2) shall be applied at the entity level,
Amended 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(4)(A), substituted “paragraph (2)” for “paragraph (3)”.
(ii) in determining overpayments and underpayments for purposes of applying paragraph (2)(B)—
Amended 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(4)(B), substituted “paragraph (2)(B)” for “paragraph (3)(B)” in introductory provisions.
(I) any increase in the income under the contract for any taxable year by reason of the allocation under paragraph (2)(A) shall be treated as giving rise to an underpayment determined by applying the highest rate for such year to such increase, and
Amended 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(4)(C), substituted “paragraph (2)(A)” for “paragraph (3)(A)”.
(II) any decrease in such income for any taxable year by reason of such allocation shall be treated as giving rise to an overpayment determined by applying the highest rate for such year to such decrease, and
(iii) any interest required to be paid by the taxpayer under paragraph (2) shall be paid by such entity (and any interest entitled to be received by the taxpayer under paragraph (2) shall be paid to such entity).
Amended 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(4)(A), substituted “paragraph (2)” for “paragraph (3)” in two places.
(B) Exceptions
(i) Closely held pass-thru entities This paragraph shall not apply to any closely held pass-thru entity.
Cited by 1
(ii) Foreign contracts This paragraph shall not apply to any contract unless substantially all of the income from such contract is from sources in the United States.
(C) Other definitions For purposes of this paragraph—
(i) Highest rate The term “highest rate” means—
(I) the highest rate of tax specified in section 11, or
(II) if at all times during the year involved more than 50 percent of the interests in the entity are held by individuals directly or through 1 or more other pass-thru entities, the highest rate of tax specified in section 1.
(ii) Pass-thru entity The term “pass-thru entity” means any—
(I) partnership,
(II) S corporation, or
(III) trust.
(iii) Closely held pass-thru entity The term “closely held pass-thru entity” means any pass-thru entity if, at any time during any taxable year for which there is income under the contract, 50 percent or more (by value) of the beneficial interests in such entity are held (directly or indirectly) by or for 5 or fewer persons. For purposes of the preceding sentence, rules similar to the constructive ownership rules of section 1563(e) shall apply.
Cited by 1
(5) Election to use 10-percent method
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(b), added par. (5).
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(1), redesignated former par. (5) as (4).
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 5041(d), added par. (5).
Cited by 3
(A) General rule In the case of any long-term contract with respect to which an election under this paragraph is in effect, the 10-percent method shall apply in determining the taxable income from such contract.
(B) 10-percent method For purposes of this paragraph—
(i) In general The 10-percent method is the percentage of completion method, modified so that any item which would otherwise be taken into account in computing taxable income with respect to a contract for any taxable year before the 10-percent year is taken into account in the 10-percent year.
(ii) 10-percent year The term “10-percent year” means the 1st taxable year as of the close of which at least 10 percent of the estimated total contract costs have been incurred.
(C) Election An election under this paragraph shall apply to all long-term contracts of the taxpayer which are entered into during the taxable year in which the election is made or any subsequent taxable year.
(D) Coordination with other provisions
(i) Simplified method of cost allocation This paragraph shall not apply to any taxpayer which uses a simplified procedure for allocation of costs under paragraph (3)(A).
(ii) Look-back method The 10-percent method shall be taken into account for purposes of applying the look-back method of paragraph (2) to any taxpayer making an election under this paragraph.
(6) Election to have look-back method not apply in de minimis cases
Amended 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1211(a), added par. (6).
Cited by 2
(A) Amounts taken into account after completion of contract Paragraph (1)(B) shall not apply with respect to any taxable year (beginning after the taxable year in which the contract is completed) if—
(i) the cumulative taxable income (or loss) under the contract as of the close of such taxable year, is within
(ii) 10 percent of the cumulative look-back taxable income (or loss) under the contract as of the close of the most recent taxable year to which paragraph (1)(B) applied (or would have applied but for subparagraph (B)).
(B) De minimis discrepancies Paragraph (1)(B) shall not apply in any case to which it would otherwise apply if—
Cited by 1
(i) the cumulative taxable income (or loss) under the contract as of the close of each prior contract year, is within
(ii) 10 percent of the cumulative look-back income (or loss) under the contract as of the close of such prior contract year.
(C) Definitions For purposes of this paragraph—
(i) Contract year The term “contract year” means any taxable year for which income is taken into account under the contract.
(ii) Look-back income or loss The look-back income (or loss) is the amount which would be the taxable income (or loss) under the contract if the allocation method set forth in paragraph (2)(A) were used in determining taxable income.
(iii) Discounting not applicable The amounts taken into account after the completion of the contract shall be determined without regard to any discounting under the 2nd sentence of paragraph (2).
(D) Contracts to which paragraph applies This paragraph shall only apply if the taxpayer makes an election under this subparagraph. Unless revoked with the consent of the Secretary, such an election shall apply to all long-term contracts completed during the taxable year for which election is made or during any subsequent taxable year.
(7) Adjusted overpayment rate
Amended 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1211(b)(2), added par. (7).
Cited by 2
(A) In general The adjusted overpayment rate for any interest accrual period is the overpayment rate in effect under section 6621 for the calendar quarter in which such interest accrual period begins.
Cited by 1
(B) Interest accrual period For purposes of subparagraph (A), the term “interest accrual period” means the period—
(i) beginning on the day after the return due date for any taxable year of the taxpayer, and
(ii) ending on the return due date for the following taxable year.
For purposes of the preceding sentence, the term “return due date” means the date prescribed for filing the return of the tax imposed by this chapter (determined without regard to extensions).
(c) Allocation of costs to contract
Cited by 3
(1) Direct and certain indirect costs In the case of a long-term contract, all costs (including research and experimental costs) which directly benefit, or are incurred by reason of, the long-term contract activities of the taxpayer shall be allocated to such contract in the same manner as costs are allocated to extended period long-term contracts under section 451 and the regulations thereunder.
Cited by 2
(2) Costs identified under cost-plus and certain Federal contracts In the case of a cost-plus long-term contract or a Federal long-term contract, any cost not allocated to such contract under paragraph (1) shall be allocated to such contract if such cost is identified by the taxpayer (or a related person), pursuant to the contract or Federal, State, or local law or regulation, as being attributable to such contract.
Cited by 1
(3) Allocation of production period interest to contract
(A) In general Except as provided in subparagraphs (B) and (C), in the case of a long-term contract, interest costs shall be allocated to the contract in the same manner as interest costs are allocated to property produced by the taxpayer under section 263A(f).
Cited by 2
(B) Production period In applying section 263A(f) for purposes of subparagraph (A), the production period shall be the period—
Cited by 1
(i) beginning on the later of—
(I) the contract commencement date, or
(II) in the case of a taxpayer who uses an accrual method with respect to long-term contracts, the date by which at least 5 percent of the total estimated costs (including design and planning costs) under the contract have been incurred, and
Cited by 1
(ii) ending on the contract completion date.
(C) Application of de minimis rule In applying section 263A(f) for purposes of subparagraph (A), paragraph (1)(B)(iii) of such section shall be applied on a contract-by-contract basis; except that, in the case of a taxpayer described in subparagraph (B)(i)(II) of this paragraph, paragraph (1)(B)(iii) of section 263A(f) shall be applied on a property-by-property basis.
Cited by 1
(4) Certain costs not included This subsection shall not apply to any—
Cited by 1
(B) expenses for unsuccessful bids and proposals, and
(C) marketing, selling, and advertising expenses.
(5) Independent research and development expenses For purposes of paragraph (4), the term “independent research and development expenses” means any expenses incurred in the performance of research or development, except that such term shall not include—
(A) any expenses which are directly attributable to a long-term contract in existence when such expenses are incurred, or
(B) any expenses under an agreement to perform research or development.
(6) Special rule for allocation of bonus depreciation with respect to certain property
Amended 2010
- 2010 Pub. L. 111-240 Pub. L. 111–240 added par. (6).
(A) In general Solely for purposes of determining the percentage of completion under subsection (b)(1)(A), the cost of qualified property shall be taken into account as a cost allocated to the contract as if subsection (k) of section 168 had not been enacted.
(B) Qualified property For purposes of this paragraph, the term “qualified property” means property described in section 168(k)(2) which has a recovery period of 7 years or less.
Amended 2013, 2014, 2015, 2017, 2025
- 2025 Pub. L. 119-21 Pub. L. 119–21, § 70301(a)(5)(D), substituted “which has a recovery period of 7 years or less.” for “which—
“(i) has a recovery period of 7 years or less, and
“(ii) is placed in service before January 1, 2027 (January 1, 2028 in the case of property described in section 168(k)(2)(B)).”
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13201(b)(2)(A), substituted “January 1, 2027 (January 1, 2028” for “January 1, 2020 (January 1, 2021”.
- 2015 Pub. L. 114-113 Pub. L. 114–113, § 143(b)(6)(I), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “is placed in service after December 31, 2009, and before January 1, 2011 (January 1, 2012, in the case of property described in section 168(k)(2)(B)), or after December 31, 2012, and before January 1, 2016 (January 1, 2017, in the case of property described in section 168(k)(2)(B)).”
- 2015 Pub. L. 114-113 Pub. L. 114–113, § 143(a)(2), substituted “January 1, 2016 (January 1, 2017” for “January 1, 2015 (January 1, 2016”.
- 2014 Pub. L. 113-295 Pub. L. 113–295 substituted “January 1, 2015 (January 1, 2016” for “January 1, 2014 (January 1, 2015”.
- 2013 Pub. L. 112-240 Pub. L. 112–240 inserted “, or after December 31, 2012, and before January 1, 2014 (January 1, 2015, in the case of property described in section 168(k)(2)(B))” before period at end.
(d) Federal long-term contract For purposes of this section—
Cited by 3
(1) In general The term “Federal long-term contract” means any long-term contract—
(A) to which the United States (or any agency or instrumentality thereof) is a party, or
Cited by 1
(B) which is a subcontract under a contract described in subparagraph (A).
Cited by 1
(2) Special rules for certain taxable entities For purposes of paragraph (1), the rules of section 168(h)(2)(D) (relating to certain taxable entities not treated as instrumentalities) shall apply.
(e) Exception for certain construction contracts
Amended 1988, 1989, 1990, 1996, 2017, 2025
- 2025 Pub. L. 119-21 Pub. L. 119–21, § 70430(a)(2), redesignated par. (5) as (4).
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13102(d)(2), redesignated pars. (4) to (6) as (3) to (5), respectively, and struck out former par. (3) which related to controlled group of corporations.
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1702(h)(15), substituted “section 168(e)(2)(A)(ii)” for “section 167(k)”.
- 1990 Pub. L. 101-508 Pub. L. 101–508 substituted “section 168(e)(2)(A)(ii)” for “section 167(k)”.
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7621(c)(5), inserted introductory provisions and struck out former introductory provisions which read as follows: “In the case of any residential construction contract which is not a home construction contract, subsection (a) shall be applied—”.
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7815(e)(1)(A), substituted “activities referred to in paragraph (4) with respect to” for “the building, construction, reconstruction, or rehabilitation of”.
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7815(e)(1)(B), added cl. (i) and struck out former cl. (i) which read as follows: “dwelling units contained in buildings containing 4 or fewer dwelling units, and”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 5041(b)(2), added par. (5).
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 5041(b)(3), added par. (6).
Cited by 2
(1) In general Subsections (a), (b), and (c)(1) and (2) shall not apply to—
Amended 1988, 2025
- 2025 Pub. L. 119-21 Pub. L. 119–21, § 70430(a)(1), in concluding provisions, substituted “residential construction contract” for “home construction contract” and inserted “(determined by substituting ‘3-year’ for ‘2-year’ in subparagraph (B)(i) for any residential construction contract which is not a home construction contract)” after “the requirements of clauses (i) and (ii) of subparagraph (B)”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 5041(b)(1), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “Subsections (a), (b), and (c)(1) and (2) shall not apply to any construction contract entered into by a taxpayer—
“(A) who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and
“(B) whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000.”
Cited by 2
(A) any residential construction contract, or
Amended 2025
- 2025 Pub. L. 119-21 Pub. L. 119–21, § 70430(a)(1)(A), substituted “residential construction contract” for “home construction contract”.
Cited by 2
(B) any other construction contract entered into by a taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3))—
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13102(d)(1)(A), in introductory provisions, inserted “(other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3))” after “taxpayer”.
Cited by 5
(i) who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and
Cited by 2
(ii) who meets the gross receipts test of section 448(c) for the taxable year in which such contract is entered into.
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13102(d)(1)(B), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000.”
Cited by 4
In the case of a residential construction contract with respect to which the requirements of clauses (i) and (ii) of subparagraph (B) (determined by substituting “3-year” for “2-year” in subparagraph (B)(i) for any residential construction contract which is not a home construction contract) are not met, section 263A shall apply notwithstanding subsection (c)(4) thereof.
(2) Rules related to gross receipts test
Amended 1989, 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13102(d)(2), added par. (2) and struck out former par. (2) which related to determination of taxpayer’s gross receipts.
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(e)(5), added subpar. (C).
Cited by 1
(A) Application of gross receipts test to individuals, etc. For purposes of paragraph (1)(B)(ii), in the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership.
(B) Coordination with section 481 Any change in method of accounting made pursuant to paragraph (1)(B)(ii) shall be treated as initiated by the taxpayer and made with the consent of the Secretary. Such change shall be effected on a cut-off basis for all similarly classified contracts entered into on or after the year of change.
(3) Construction contract For purposes of this subsection, the term “construction contract” means any contract for the building, construction, reconstruction, or rehabilitation of, or the installation of any integral component to, or improvements of, real property.
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13102(d)(2), redesignated pars. (4) to (6) as (3) to (5), respectively, and struck out former par. (3) which related to controlled group of corporations.
Cited by 2
(4) Definitions relating to residential construction contracts For purposes of this subsection—
Amended 2017, 2025
- 2025 Pub. L. 119-21 Pub. L. 119–21, § 70430(a)(2), redesignated par. (5) as (4) and struck out former par. (4). Prior to amendment, text of par. (4) read as follows: “In the case of any residential construction contract which is not a home construction contract, subsection (a) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1989) shall apply except that such subsection shall be applied—
“(A) by substituting ‘70 percent’ for ‘90 percent’ each place it appears, and
“(B) by substituting ‘30 percent’ for ‘10 percent’.”
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13102(d)(2), redesignated pars. (4) to (6) as (3) to (5), respectively, and struck out former par. (3) which related to controlled group of corporations.
Cited by 1
(A) Home construction contract The term “home construction contract” means any construction contract if 80 percent or more of the estimated total contract costs (as of the close of the taxable year in which the contract was entered into) are reasonably expected to be attributable to activities referred to in paragraph (3) with respect to—
Amended 2025
- 2025 Pub. L. 119-21 Pub. L. 119–21, § 70430(a)(3), substituted “paragraph (3)” for “paragraph (4)” in introductory provisions.
Cited by 1
(i) dwelling units (as defined in section 168(e)(2)(A)(ii)) contained in buildings containing 4 or fewer dwelling units (as so defined), and
Cited by 1
(ii) improvements to real property directly related to such dwelling units and located on the site of such dwelling units.
For purposes of clause (i), each townhouse or rowhouse shall be treated as a separate building.
(B) Residential construction contract The term “residential construction contract” means any contract which would be described in subparagraph (A) if clause (i) of such subparagraph reads as follows:
“(i) dwelling units (as defined in section 168(e)(2)(A)(ii)), and”.
(f) Long-term contract For purposes of this section—
Cited by 5
(1) In general The term “long-term contract” means any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into.
(2) Special rule for manufacturing contracts A contract for the manufacture of property shall not be treated as a long-term contract unless such contract involves the manufacture of—
(A) any unique item of a type which is not normally included in the finished goods inventory of the taxpayer, or
(B) any item which normally requires more than 12 calendar months to complete (without regard to the period of the contract).
(3) Aggregation, etc. For purposes of this subsection, under regulations prescribed by the Secretary—
Cited by 1
(A) 2 or more contracts which are interdependent (by reason of pricing or otherwise) may be treated as 1 contract, and
(B) a contract which is properly treated as an aggregation of separate contracts may be so treated.
(g) Contract commencement date For purposes of this section, the term “contract commencement date” means, with respect to any contract, the first date on which any costs (other than bidding expenses or expenses incurred in connection with negotiating the contract) allocable to such contract are incurred.
(h) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations to prevent the use of related parties, pass-thru entities, intermediaries, options, or other similar arrangements to avoid the application of this section.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 5041(c), added subsec. (h).