# Prop. Treas. Reg. § 1.460-4: Methods of accounting for long-term contracts. Proposed regulation, not in force. REG-120844-07, 73 FR 45180, published 2008-08-04 . Interprets 26 U.S.C. § 460. Par. 3. Section 1.460-4 is amended by: 1. Revising the third sentence in paragraph (c)(1). 2. Redesignating paragraph (g) as paragraph (g)(1) and revising newly redesignated paragraph (g)(1). 3. Adding a paragraph (g)(2). 4. Revising Example 5. of paragraph (h). The revisions and additions read as follows: * * * * * (c) * * * (1) * * * Permissible exempt contract methods are the PCM, the EPCM described in paragraph (c)(2) of this section, the CCM described in paragraph (d) of this section, the accrual method, and any other permissible method. * * * * * * * * (g) Method of accounting —(1) In general. A taxpayer must apply its method(s) of accounting for long-term contracts consistently for all similarly classified long-term contracts until the taxpayer obtains the Commissioner's consent under section 446(e) to change to another method of accounting. (2) Taxpayer-initiated change in method of accounting —(i) Change to PCM for long-term contracts for which PCM is required. A taxpayer-initiated change in method of accounting for long-term contracts (or portion thereof) for which income must be determined using the PCM described in paragraph (b) of this section and the costs allocation rules described in § 1.460-5(b) or (c) (required PCM contracts) from a method of accounting that does not comply with paragraph (b) of this section and § 1.460-5(b) or (c) to a method that complies with paragraph (b) of this section and § 1.460-5(b) or (c) must be applied to all required PCM contracts entered into before the year of change and not reported as completed as of the beginning of the year of change. Accordingly, a section 481(a) adjustment will be required. (ii) Change from a permissible PCM method to another permissible PCM method for long-term contracts for which PCM is required. A taxpayer initiated change in method of accounting for required PCM contracts, as defined in paragraph (g)(2)(i) of this section (or a portion thereof), from a method of accounting that complies with paragraph (b) of this section and § 1.460-5(b) or (c) to another method of accounting that complies with paragraph (b) of this section and § 1.460-5(b) or (c) must be made on a cut-off basis and applied only to contracts entered into during and after the year of change. Accordingly, a section 481(a) adjustment will be neither permitted nor required. (iii) Change to an exempt contract method for home construction contracts. A taxpayer-initiated change in method of accounting for home construction contracts, as defined in § 1.460-3(b)(2), to a permissible exempt contract method, as described in paragraph (c)(1) of this section, must be applied to all home construction contracts entered into before the year of change and not reported as completed as of the beginning of the year of change. Accordingly, a section 481(a) adjustment will be required. (iv) Change to an exempt contract method for exempt contracts other than home construction contracts. A taxpayer-initiated change in method of accounting for long-term contracts (or portion thereof) not described in paragraphs (g)(2)(i), (ii) and (iii) of this section to a permissible exempt contract method as described in paragraph (c)(1) of this section must be applied to all contracts that are eligible to use the exempt contract method entered into before the year of change and not reported as completed as of the beginning of the year of change. Accordingly, a section 481(a) adjustment will be required. (h) * * * * * * * * Example 5. PCM—contract terminated. C, whose taxable year ends December 31, determines the income from long-term contracts using the PCM. During 2001, C buys land and begins constructing a building that will contain 50 apartment units on that land. C enters into a contract to sell the building to B for $2,400,000. B gives C a $50,000 deposit toward the purchase price. By the end of 2001, C has incurred $500,000 of allocable contract costs on the building and estimates that the total allocable contract costs on the building will be $1,500,000. Thus, for 2001, C reports gross receipts of $800,000 ($500,000/$1,500,000 × $2,400,000), current-year costs of $500,000, and gross income of $300,000 ($800,000−$500,000). In 2002, after C has incurred an additional $250,000 of allocable contract costs on the building, B files for bankruptcy protection and defaults on the contract with C, who is permitted to keep B's $50,000 deposit as liquidated damages. In 2002, C reverses the transaction with B under paragraph (b)(7) of this section and reports a loss of $300,000 ($500,000−$800,000). In addition, C obtains an adjusted basis in the building sold to B of $700,000 ($500,000 (current-year costs deducted in 2001)−$50,000 (B's forfeited deposit) + $250,000 (current-year costs incurred in 2002). C may not apply the look-back method to this contract in 2002. * * * * *