Our completed project's final costs changed later. Do we need a look-back interest calculation?
A later final-cost adjustment can require a look-back interest review for a contract reported under percentage of completion.
By AE Tax Advisors Team · Updated October 28, 2026
A later final-cost adjustment can require a look-back interest review for a contract reported under percentage of completion. Look-back is not simply a revision of taxable income on old returns: it generally measures the effect of recomputing prior allocations using actual results. Statutory exceptions and de minimis rules must be checked.
A specific business-owner situation
A completed commercial project receives a late subcontractor settlement that changes final costs. The owner assumes the current deduction is the only remaining tax step.
Illustrative example, not a client result.
What to establish before filing
- Identify the original contract method.
- Check whether look-back and an exception apply.
- Determine the redetermination year and required calculation.
Which fact changes the answer?
A contract outside mandatory percentage-of-completion rules may be treated differently from one subject to them. The applicable exception must be established rather than inferred from project size.
A mistake to avoid
Do not assume a small accounting adjustment is automatically exempt from look-back.
Records that support the decision
- Original annual contract schedules.
- Final cost reconciliation.
- Prior look-back filings.
The decision to document
Document whether Form 8697 or another follow-up is required and retain the supporting exemption calculation if not.
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Related questions
- My customer has not approved a construction change order. Does it belong in contract revenue yet?
- Does a small job that crosses December automatically require percentage-of-completion reporting?
Sources and editorial context
- Section 460: long-term contracts
- Treasury regulation 1.460-1: contract classification and completion
- Treasury regulation 1.460-5: contract costs
- Treasury regulation 1.460-4: contract revenue and estimates
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.