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2016 Instructions for Form FTB 3834

Interest Computation Under the Look-Back Method for Completed Long-Term Contracts

References in these instructions are to the Internal Revenue Code (IRC) as of January 1, 2015, and to the California Revenue and Taxation Code (R&TC).

General Information

In the year a long-term contract is completed,

January 1, 1998. The look-back method does

the look-back method requires the taxpayer to

not apply in the following cases if the election

In general, for taxable years beginning on or

do the following:

is made:

after January 1, 2015, California law conforms

y “Look back” to each of the previous years

1. In the completion year if, for each prior

to the Internal Revenue Code (IRC) as of

during which the contract work was in

contract year, the cumulative taxable

January 1, 2015. However, there are continuing

progress.

income (or loss) actually reported under the

differences between California and federal

y Compute interest in those years on the

contract is within 10% of the cumulative

law. When California conforms to federal tax

difference between the tax that was actually

look-back income (or loss). Cumulative

law changes, we do not always adopt all of

paid and the tax that would have been

income (or loss) is the amount of taxable

the changes made at the federal level. For

paid if the taxpayer had known the actual

income (or loss) that you would have

more information, go to ftb.ca.gov and search

contract price and cost of the completed

reported if you had used actual contract

for conformity. Additional information can

contract.

price and costs instead of estimated

be found in FTB Pub. 1001, Supplemental

contract price and costs.

Guidelines to California Adjustments, the

Who Must File

2. In a post-completion year if, as of the close

instructions for California Schedule CA (540

of the post-completion year, the cumulative

File form FTB 3834, for the following:

or 540NR), and the Business Entity tax booklets.

taxable income (or loss) under the contract

y Each taxable year the long-term contract is

The instructions provided with California tax

is within 10% of the cumulative look-back

completed.

forms are a summary of California tax law

income (or loss) under the contract as of

y Each taxable year the contract price or

and are only intended to aid taxpayers in

the close of the most recent year in which

contract cost is adjusted for one or more

preparing their state income tax returns. We

the look-back method was applied to the

long-term contracts from a prior year.

include information that is most useful to the

contract (or would have been applied if the

See the instructions for federal Form 8697,

greatest number of taxpayers in the limited

election had not been made).

Interest Computation Under the Look-Back

space available. It is not possible to include

For purposes of item 2, discounting under

Method for Completed Long-Term Contracts,

all requirements of the California Revenue

IRC Section 460(b)(2) does not apply.

for more information about filing requirements

and Taxation Code (R&TC) in the instructions.

To make the election, attach a statement to

such as how to determine whether the

Taxpayers should not consider the instructions

your timely filed tax return (determined with

look-back interest computation is required at

as authoritative law.

extensions) for the first taxable year of the

the entity or ownership level in the case of a

Interest Computation

election. Write at the top of the statement

pass-through entity (S corporation, estate,

The cumulative effect of applying the look-back

“NOTIFICATION OF ELECTION UNDER IRC

trust, partnership, or limited liability company

method is taken into account beginning in

SECTION 460(b)(6).” Include on the statement

(LLC) treated as a partnership).

the filing year even though look-back interest

your name, identification number, and the

is not computed for that year. Income is

Exceptions

effective date of the election. Also identify the

hypothetically reallocated to or from the filing

trades or businesses that involve long-term

The look-back method does not apply to

year or to or from the redetermination years.

contracts. Once made, the election applies to

regular taxable income from the following

Look-back does not create or decrease income;

all contracts completed during the election year

items:

it only hypothetically changes the tax year of

and all later taxable years. The election may not

recognition.

y Any home construction contract, as defined

be revoked except with the written consent of

in IRC Section 460(e)(6)(A).

Registered Domestic Partners (RDP)

the Franchise Tax Board (FTB).

y Any construction contract entered into:

For purposes of California income tax,

Contract Commencement Date. The first

(a) that you estimate the contract will

references to a spouse, husband, or wife also

date on which any costs (other than bidding

be completed within two years from the

refer to a RDP, unless otherwise specified.

expenses or expenses incurred in connection

contract commencement date, and

When we use the initials RDP they refer to both

with negotiating the contract) allocable to the

(b) where average annual gross receipts for

a California registered domestic “partner” and

contract are incurred. For more information,

the three taxable years before the taxable

a California registered domestic “partnership,”

see IRC Section 460(g).

year the contract is entered into do not

as applicable. For more information on

exceed $10 million. See IRC Section 460(e).

When to File

RDPs, get FTB Pub. 737, Tax Information for

y Any contract completed within two years

Registered Domestic Partners.

File form FTB 3834 at the time you are required

from the contract commencement date,

Private Mail Box (PMB)

to file your California tax return (including

if the gross price of the contract (as of

Include the PMB in the address field. Write

extensions) for your taxable year in which one

contract completion) does not exceed the

“PMB” first, then the box number. Example:

or more long-term contracts are completed (or

smaller of any of the following items:

111 Main Street PMB 123.

at any other time required by IRC Section 460

(a) $1 million.

or the regulations thereunder).

(b) One percent of average annual gross

Purpose

receipts for the three tax years before

y Individuals, estates, or trusts, sign Side 2

Use form FTB 3834, Interest Computation

the tax year of contract completion.

and file form FTB 3834 as a separate return.

Under the Look-Back Method for Completed

See IRC Section 460(b)(3)(B) for more

Do not attach it to Form 540, California

Long-Term Contracts, to compute the interest

information.

Resident Income Tax Return; Long

due, or to be refunded using the look-back

Form 540NR, California Nonresident or

De Minimis Exception. You may elect not

method under IRC Section 460(b)(2), on

Part-Year Resident Income Tax Return; or

to apply the look-back method in certain

certain long-term contracts entered into after

Form 541, California Fiduciary Income Tax

de minimis cases for contracts completed

February 28, 1986, that are accounted for

Return.

in taxable years beginning on or after

under either the percentage of completion

method or the percentage of completion

capitalized cost method.

FTB 3834 Instructions 2016 Page 1

Instructions For Form Ftb 3834 - Interest Computation Under The Look-Back Method For Completed Long-Term Contracts - 2016

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