For businesses with long-term contracts of certain types, Form 8697 is used to determine the amount of interest due or refundable under the look-back method of taxation. Learn who must file the form, how pass-through entities are subject to different rules, and the changes that occur if there is a mid-contract change in taxpayer.
What is Form 8697?
Form 8697 is utilized to calculate the total amount of interest due or refunded under the look-back method of section 460(b)(2), in the context of a certain long-term contract accounted for using either the percentage of completion or the percentage of completion-capitalized cost method. It must be filed for each tax year in which the contract is completed, or, in the event of an adjustment to the contract price or costs, for subsequent tax years. Pass-through entities, both closely and non-closely held, must also apply the look-back method when earnings from the contract resemble 95% of gross income from U.S. sources. If ownership responsibilities change mid-transaction, the look-back method is applied for both pre- and post-transaction years.
IRS Form 8697 – Who Needs to Fill It Out?
Generally, those who completed a long-term contract after February 28, 1986 that was accounted for under the percentage of completion method or the percentage of completion-capitalized cost method must complete the form. Furthermore, any owners of a pass-through entity who are not closely held, and mid-contract change in taxpayers are also required to fill out the form. The pass-through entity will provide on Schedule K-1 the necessary information to complete the form. Per the Regulations sections 1.460-4 and 1.460-6, the form must be completed to calculate the interest due or refunded under the look-back method.
Step-by-Step: Form 8697 Instructions for Filling Out the Document
Filing Form 8697 is mandatory for any tax year in which you completed a long-term contract after February 28, 1986 for federal income tax purposes which was accounted for using either the percentage of completion or the percentage of completion-capitalized cost method. For pass-through entities (partnerships, S corporations, and trusts) that are not closely held, this form must be applied at the entity level to any contract with at least 95% of income from U.S. sources. In the event of mid-contract taxpayer changes, the look-back method will need to be applied at the entity level regarding prior contracts regardless of ownership, and the old or new taxpayer may need to apply it to both pre- and post-transaction years.
Below, we present a table that will help you understand how to fill out Form 8697.
|Information Required for Form 8697||Details|
|Filing Requirement||Mandatory for long-term contracts completed after February 28, 1986|
|Pass-Through Entities||Apply at the entity level for contracts with at least 95% of income from U.S. sources|
|Mid-Contract Changes||Look-back method applies for mid-contract taxpayer changes|
Do You Need to File Form 8697 Each Year?
Yes, Form 8697 must be filled out for each tax year in which a long-term contract is completed after February 28, 1986, or if the contract price or costs are adjusted. Further, pass-through entities must apply the look-back method to any contract with 95% or more of its income from U.S. sources, unless they are considered closely held by five or fewer persons. Additionally, mid-contract changes in taxpayers require separate look-back forms to be filed. Both the old and the new taxpayer must file for the period before and after the transaction, each in the respective tax year.
Download the Official IRS Form 8697 PDF
On the official IRS website, you will find a link to download Form 8697. However, to make it easier for you, we are providing the link in our article, which comes directly from the official irs.gov website! Click to download: Form 8697