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Let’s Talk Look-Back

Courtney Vitale, CPA
Published Date:
Apr 1, 2023

What is look-back? Look-back is essentially a re-visit under the premise of: If I would have known then what I know now, how would the Gross Profit on the job be different? You are looking back to see. It is a hypothetical calculation, and that is because you are not amending returns; it is just a hypothetical calculation of tax with interest resulting thereof. You look back to see if the gross profit would have been “over-” or “under-” reported given the final results of the job. That gross profit is then taxed in a hypothetical nature and the interest (emphasis: it’s the interest) that is then either owed by the taxpayer or due to the taxpayer. The interest rate is per §6621, and the hypothetical calculation is cumulative. (

With that as a backdrop, here’s why it exists. Percentage of Completion (PCM) is an allowable method and, for many, a required Method of Accounting for Long-term (LT) Contracts. IRC §460 is dedicated to PCM. ( PCM is based upon estimates: Job-to-Date Job Costs / Total Estimated Job Costs. Sometimes the PCM changes because of the nature of estimating, sometimes it changes due to changes in the scope of the work, and sometimes the PCM stays the same, but the Total Contract amount changes. All of these impact the gross profit reported each year. The result is that gross profit can, and very often does, change once you have finalized components that are known at the end of the job.    

For a very simple example, let’s say there is an LT contract that in year 1 is estimated to be 37% complete. At the close of the job, using actual and not estimated amounts, year one really would have been 44% complete. You are then performing a hypothetical calculation using 44% of the gross profit (up from 37%) and then calculating interest on that additional 7%. 

When you have a job reported on PCM, think Look-back. Where does Look-back apply?  It applies to LT contracts reported on PCM. There are, of course, exceptions and exemptions. 

A Small Contractor who does not report LT contracts on PCM does not calculate Look-back for Regular Income tax purposes. They must, however, still calculate it for AMT purposes.  Remember too that Aggregation Rules apply when evaluating Small Contractor eligibility. 

There is also a Small Contract Exception. Note the language difference here, it is the Contract or Job itself that is potentially excepted from the calculation. This is also referred to as the de minimis Exception; not to be confused with de minimis discrepancies mentioned a little later in this article. See §1.460-6(b)(3). (

A job is a Small Contract if it does not exceed the lesser of a) $1 million (at the time of writing this article, this amount is not adjusted for inflation) or b) 1% of the Average Annual Gross Receipts for the three years prior to completion. There is a second requirement: the job must also have been completed within two years of the contract commencement date. Whether favorable or unfavorable, when this exception is met, it is mandatory to not calculate look-back on those applicable jobs. 

There are also Elections that can be made. One such election is the Simplified Marginal Impact Method; see §460(b)(4). (  This method is required if the entity is not closely held, otherwise the taxpayer can elect for it to apply.  Closely held is where five or fewer own 50% or more of the value, remembering attribution rules apply. Under this method, the hypothetical tax is at the highest rates under either Section 11 for Corporations or Section 1 for Individuals. ( The “simplicity” comes from the fact that because the hypothetical tax is calculated at the highest rate, the exercise of seeing the impact through to the underlying returns is not a necessary step. The highest rate for individuals is used if at all times during the redetermination year, more than 50% is held (directly or indirectly) by individuals. The redetermination year is the year to which you are looking back in your hypothetical tax calculation. Under this method, there is also a requirement for substantially all income to be from the United States. 

Another Election is the de minimis discrepancies (again, different than the de minimis Exception noted earlier).  This looks at the differences in Gross Profit % for each of the prior years. If the actual results using the final PCM & Contract Amount produces a result that is within 10% of the reported gross profit %, the differences (discrepancies) being less than 10%, are deemed de minimis. See § 460(b)(6)(B).  
(  If these conditions are met, the taxpayer can elect to have Look-back not apply. The election is Irrevocable, and it applies to all LT contracts completed during and after the taxable year for which the election is effective. See §1.460-(6)(j).  (

The following also add a degree of complexity: Post-Completion costs; Credits; PCCM Method; 10% Election; Net Operating Losses (NOLs); Changes in Ownership. Let’s discuss a few of those here:

PCCM is the method used for Residential Construction Contracts. It uses a 70/30 split where 70% is reported under PCM and 30% under an Exempt Method. Look-back needs to be considered on the PCM portion for regular tax and the full amount for AMT as AMT requires the use of PCM.     

The 10% election is made to defer gross profit until the job is 10% or more complete.  ( Because you are looking back, the year the job reaches 10% could be different when you do the hypothetical calculation. It could be earlier or later than the year reported. 

When an NOL carryback would change on a hypothetical calculation for Look-back, the interest is calculated in the redetermination year. The hypothetical calculation of tax goes all the way back to the year the NOL carryback was absorbed, but the interest only to the year that generated the NOL. 

Look-back is calculated after the job is complete or deemed complete. It is filed using Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts.  When the hypothetical tax results in an interest charge, it is added to the return. When the hypothetical tax results in an interest refund, the form must be filed separately; if married filed jointly, the form must be signed by both taxpayer and spouse. At the time of writing this article, this form could not be separately e-filed for a refund and must be paper-filed with the IRS at the address in the instructions. 

There are several factors that make Look-back fairly involved.  A recommended approach is be methodical. Chart it out, starting at the very beginning: is this job to be reported using PCM for tax purposes? Which exceptions and elections are available and / or required? Then look, job by job by job. 


Courtney Vitale, CPA, is a Tax Director at CBIZ MHM, LLC in suburban Philadelphia.  Courtney leads the Construction and Real Estate Practice for the Tax Department in her office.  She is a member of the AICPA; PICPA; ABC; CFMA; and GBCA; she serves on CFMA’s National DEI + Committee. Ms. Vitale can be contacted at