Accounting for long-term contracts – Understanding look-back is in your best interest
Abstract: When the percentage-of-completion method (PCM) is used to account for long-term contracts, income might end up being understated or overstated. Either way, it’s important for tax reporting purposes to understand the look-back rules, in which one “looks back” at the income or loss reported for the job for each tax year during which the contract was performed. This article takes a look at the procedures involved, and instances in which the look-back rules don’t apply. A sidebar discusses the simplified marginal impact method (SMIM) that non-closely-held pass-through entities are required to use.