Long-term Contract

Long-term Contract

Long-term Contract means:
any contract for the manufacture, building, installation, or construction of property if the contract is not completed within the taxable year in which it is entered into. A manufacturing contract will not be treated as a long-term contract unless it involves the manufacture of:

1. any unique item of a type not normally included in finished goods inventory, or.

2. any item that normally requires more than 12 months to complete.

Long-term contracts must be accounted for under the percentage of completion method, with the exception of:

1. home and residential construction contracts, and.

2. contracts entered into by a taxpayer who estimates that they will be completed within 2 years and whose average annual gross receipts for the 3 preceding taxable years do not exceed $10 million.

Long-term contracts reported under the percentage of completion method are also subject to the look-back rule for recomputing prior-year tax liability. IRC (check if this IRC provision is current here) §460.


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