Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts
Form 8697 figures the interest you owe or are owed after a long-term contract is completed and the estimates used in earlier years are trued up. Fill in the official IRS PDF below and download it.
This is the genuine IRS PDF, unmodified. Source: IRS official page.
What is 8697?
Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, is filed by taxpayers who reported income from long-term contracts under the percentage of completion method or the percentage of completion-capitalized cost method. When a contract is completed, the look-back method compares the income actually earned each year with what was reported based on estimates, and interest is computed on the difference in tax.
The result can run in either direction: you may owe interest to the IRS if income was understated in earlier years, or be entitled to interest from the IRS if it was overstated. The form offers a simplified method for certain filers, and pass-through entities may shift the computation to their owners.
Who files 8697?
- Contractors and builders reporting long-term contracts under the percentage of completion method
- Corporations, individuals, and pass-through owners truing up completed contracts
- Taxpayers with post-completion adjustments to contract price or costs that reopen the look-back computation
- Filers claiming a refund of look-back interest when earlier estimates overstated income
How to fill out 8697
- Identify the filing year and the prior years affected by the completed contracts at the top of the form.
- Complete Part I to refigure taxable income for each prior year as if actual contract results had been known, using the regular method.
- Figure the increase or decrease in tax for each year and the interest due on each difference at the rates in the instructions.
- Use Part II instead if you qualify for and elect the simplified marginal impact method.
- If you owe interest, download the PDF and attach it to your tax return. If you are owed interest, sign the form and file it separately as a refund claim per the instructions.
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Frequently asked questions
When do I file Form 8697 with my return versus on its own?
If the computation shows you owe interest, attach the form to your income tax return for the filing year. If the IRS owes you interest, you sign the form and file it separately, since it acts as a claim for refund.
Do small contracts trigger the look-back method?
Not all of them. Exceptions exist, including for certain small contracts and home construction contracts exempt from the percentage of completion method. The current instructions list which contracts are excepted.
What if I am a partner or S corporation shareholder?
For many pass-through situations the look-back computation is done at the owner level, using contract information the entity reports to you. The instructions explain when the entity files instead.