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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, 1998, and to the California Revenue and Taxation Code (R&TC).

General Information

level in the case of a pass-through entity (S cor-

Contract commencement date: The first date

poration, estate or trust, partnership or LLC taxed

on which any costs (other than bidding expenses

Conformity

as a partnership).

or expenses incurred in connection with negotiat-

ing the contract) allocable to the contract are

C Exceptions

In general, California tax law conforms to the

incurred. For more information, see IRC

Internal Revenue Code (IRC) as of January 1,

Section 460(g).

The look-back method does not apply to regular

1998. However, there are continuing differences

taxable income from:

D When to File

between California and federal tax law. California

•

Any home construction contract (as defined in

has not conformed to the changes made to the

File form FTB 3834 at the time you are required

IRC Section 460(e)(6)(A));

IRC by the federal Internal Revenue Service

•

to file your California tax return (including exten-

Any construction contract entered into:

(IRS) Restructuring and Reform Act of 1998

sions) for your taxable or income year in which

(a) that you estimate the contract will be com-

(Public Law 105-206) and the Tax and Trade

one or more long-term contracts are completed

pleted within 2 years from the contract com-

Relief Extension Act of 1998 (Public Law

(or at any other time required by IRC Section 460

mencement date, and

105-277). As a result, certain federal changes

or the regulations thereunder).

(b) where average annual gross receipts for

applicable to taxable or income years ending

•

the 3 taxable or income years before the tax-

Individuals, estates or trusts, partnerships and

after August 5, 1997, will only be applicable for

able or income year the contract is entered

LLCs must sign Side 2 and file form

California income or franchise tax purposes to

into do not exceed $10 million (see IRC

FTB 3834 as a separate return (do not attach

taxable or income years beginning on or after

Section 460(e)); or

it to Form 540, 540NR, 541, 565 or 568).

January 1, 1998.

•

Any contract completed within 2 years from

Corporations, S corporations and exempt

California conforms to federal law for the follow-

the contract commencement date, if the gross

organizations must enter the interest due or

ing provisions:

price of the contract (as of contract comple-

to be refunded on the appropriate line of their

•

For taxable or income years beginning on or

tion) does not exceed the smaller of:

return and attach form FTB 3834 to their

after January 1, 1998, you may elect to have

(a) $1 million, or

Form 100, 100S or 109. See instructions for

the look-back method not apply in certain de

(b) 1% of average annual gross receipts for

Part I, line 9 and line 10. Corporations, S cor-

minimis cases. See General Information C for

the 3 tax years before the tax year of contract

porations and exempt organizations are not

more information.

completion (see IRC Section 460(b)(3)(B)).

required to sign form FTB 3834.

•

For contracts completed in taxable or income

De Minimis Exception. You may elect not to

If you were an owner of an interest in a pass-

years ending on or after January 1, 1998,

apply the look-back method in certain de minimis

through entity that has completed one or more

new rules apply to determine the period for

cases for contracts completed in taxable or

long-term contracts, file form FTB 3834 for your

which the rate applies. See the instructions

income years beginning on or after January 1,

taxable or income year that ends with or includes

for Part I, line 7 and line 8 for more

1998. The look-back method does not apply in

the end of the entity’s taxable or income year in

information.

the following cases if the election is made:

which the contract was completed.

A Purpose

1. In the completion year if, for each prior con-

E Period Covered

tract year, the cumulative taxable income (or

In the year a long-term contract is completed, the

Fill in the taxable or income year line at the top

loss) actually reported under the contract is

look-back method described in IRC Section

of the form to show the year the contract was

within 10% of the cumulative look-back

460(b)(2) requires the taxpayer to ‘‘look back’’ to

completed or adjusted.

income (or loss). Cumulative income (or loss)

each of the previous years during which the con-

is the amount of taxable income (or loss) that

If you were an owner of an interest in a pass-

tract work was in progress. The taxpayer must

you would have reported if you had used

through entity that has completed one or more

compute interest in such years on the difference

actual contract price and costs instead of esti-

long-term contracts, enter your taxable or income

between the tax that was actually paid and the

mated contract price and costs.

year ending with or including the end of the

tax that would have been paid if the taxpayer

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

entity’s taxable or income year in which the con-

had known the actual contract price and costs

the post-completion year, the cumulative tax-

tract was completed.

that would finally result.

able income (or loss) under the contract is

Use form FTB 3834 to figure the interest due or

F Alternative Minimum Taxable

within 10% of the cumulative look-back

to be refunded under the look-back method (IRC

income (or loss) under the contract as of the

Income (AMTI)

Section 460(b)(2)) on certain long-term contracts

close of the most recent year in which the

entered into after February 28, 1986, that are

If you apply the percentage of completion

look-back method was applied to the contract

accounted for under either the percentage of

method to income from a long-term contract only

(or would have been applied if the election

completion method or the percentage of

for purposes of determining AMTI, you must

had not been made).

completion-capitalized cost method.

apply the look-back method to AMTI in the year

For purposes of item 2, discounting under IRC

of contract completion. This rule applies whether

B Who Must File

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

or not you are liable for alternative minimum tax

File form FTB 3834 for each taxable or income

To make the election, attach a statement to your

(AMT) for the filing year or for any prior taxable

year in which a long-term contract, as described

timely filed tax return (determined with exten-

or income year.

above, is completed. You also must file form

sions) for the first taxable or income year of the

Interest is computed under the look-back method

FTB 3834 for any taxable or income year in

election. Write at the top of the statement

to the extent your total tax liability (including the

which the contract price or contract costs are

‘‘NOTIFICATION OF ELECTION UNDER IRC

AMT liability) would have differed if the percent-

adjusted for one or more long-term contracts

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

age of completion method had been applied

from a prior year.

your name, identification number and the effec-

using actual, rather than estimated, contract price

tive date of the election. Also identify the trades

See the instructions for federal Form 8697, Inter-

and contract costs.

or businesses that involve long-term contracts.

est Computation Under the Look-Back Method

G Amended Form FTB 3834

Once made, the election applies to all contracts

for Completed Long-Term Contracts, for more

completed during the election year and all later

information about filing requirements such as

Individuals, estates or trusts, partnerships and

taxable or income years and may not be revoked

how to determine whether the look-back interest

LLCs must file an amended form FTB 3834 only

except with the written consent of the Franchise

computation is required at the entity or ownership

if the amount shown on Part I, line 6 or Part II,

Tax Board (FTB).

FTB 3834 Instructions

Page 1

(REV. 1998)

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

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