Background:

• The Tax Reform Act of 1986 revised the long-term contract accounting rules for contractors. These rules— contained in Section 460 of the Internal Revenue Code—require a construction contractor to file amended tax returns for every prior year in which a currently completed contract was in progress.

AGC Message:

• Lookback Does Not Result In the Change of a Contractor’s Tax Liability. It does not require contractors to pay more, or less, in taxes. It does, however, require a contractor to pay or receive interest, and to spend thousands of dollars on tax practitioners to make the interest calculations.
• Lookback Requires Taxes to Be Re-Calculated Multiple Times. Under the accounting rules, during each year of a multi-year contract, a contractor must estimate, using an IRS-authorized approach, approximately how much tax is owed. Under the lookback rules, at the end of the project, the contractor must go back to each year’s tax statement and recalculate, replacing estimates with actual figures, prior taxable income figures. These recalculations can go back a number of years. In the end, the same tax is paid.
• Lookback is Exceedingly Complex. Even the IRS is encountering difficulty auditing lookback 20 years after its adoption. The IRS is currently undergoing its own internal evaluation of lookback to determine whether, or if, to audit lookback for contractors under a certain length of time and how to change their current methods. For construction companies, most contracts are fulfilled in under 36 months.