FTB 3834 Instructions
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, 1993,
and to the California Revenue and Taxation Code (R&TC).
General InstructionsAPurpose of Form
In the year a long-term contract is completed, thelook-back method described in IRC Section 460(b)(2)requires the taxpayer to ‘‘look back’’ to each of theprevious years during which the contract work was inprogress and compute interest in such years on thedifference between the tax that was actually paidand the tax that would have been paid if the tax-payer had known the actual contract price and coststhat would finally result.Use form FTB 3834 to figure the interest due or tobe refunded under the look-back method (IRC Sec-tion 460(b)(2)) on certain long-term contracts enteredinto after February 28, 1986, that are accounted forunder either the percentage of completion method orthe percentage of completion-capitalized costmethod.
BSimplified Marginal ImpactMethod
IRC Reg. Section 1.460-6(d) established the simpli-fied marginal impact method for figuring look-backinterest. Passthrough entities that are not closelyheld
use this simplified method. All other tax-payers may elect to use this method for domesticcontracts.A passthrough entity is considered closely held if, atany time during any tax year for which there isincome under the contract, 50% or more (by value)of the beneficial interests in the entity is held (di-rectly or indirectly) by or for five or fewer persons.Under the simplified method, hypothetical underpay-ments or overpayments of tax in prior years are fig-ured using an assumed marginal tax rate. Thisassumed marginal tax rate is generally the higheststatutory rate of tax in effect for each prior yearunder R&TC Sections 17041 and 23151. Thismethod eliminates the need to refigure your taxliability based on actual contract price and actualcontract costs each time the look-back methodis applied.If you elect the simplified method, it must be used inthe election year and all later years, unless FTB con-sents to a revocation of the election. Use Part II tofigure the simplified marginal impact method.
CWho Must File
File form FTB 3834 for each taxable or income yearin which a long-term contract, as described above, iscompleted. You also must file form FTB 3834 for anytax year in which the contract price or contract costsare adjusted for one or more long-term contractsfrom a prior year.See the instructions for federal Form 8697, InterestComputation Under the Look-Back Method forCompleted Long-Term Contracts, for more informa-tion about filing requirements such as how to deter-mine whether the look-back interest computation isrequired at the entity or ownership level in the caseof a passthrough entity (partnership, S corporation,or trust).
The look-back method does not apply to regular tax-able income from:
any home construction contract (as defined inIRC Section 460(e)(6)(A));
any construction contract entered into that:(a) you estimate the contract will be completedwithin 2 years from the contract commencementdate, and(b) average annual gross receipts for the 3 taxa-ble or income years before the taxable or incomeyear the contract is entered into do not exceed$10 million (see IRC Section 460(e)); or
any contract completed within 2 years from thecontract commencement date if the gross priceof the contract (as of contract completion) doesnot exceed the smaller of:(a) $1 million, or(b) 1% of average annual gross receipts for the3 tax years before the tax year of contract com-pletion (see IRC Section 460(b)(3)(B)).The contract commencement date is the first date onwhich any costs (other than bidding expenses orexpenses incurred in connection with negotiating thecontract) allocable to the contract are incurred. Formore information see IRC Section 460(g).
EWhen to File
File form FTB 3834 at the time you are required tofile your California tax return (including extensions)for your taxable or income year in which one ormore long-term contracts are completed (or at anyother time required by IRC Section 460 or the regu-lations thereunder).
Individuals, limited liability companies, partner-ships and estates and trusts must sign Side2and file form FTB3834 as a separate return (do
attach it to Form540, 540NR, 541, 565, or568).
Corporations and exempt organizations mustenter the interest due or to be refunded on theappropriate line of their return and attach formFTB 3834 to their Form 100, 100S or 109. Seeinstructions for Part I, line 9 and line 10.
Corporations, S corporations and exemptorganizations are not required to sign formFTB 3834.If you were an owner of an interest in a pass-through entity that has completed one or more long-term contracts, file form FTB 3834 for your taxableor income year that ends with or includes the end ofthe entity’s taxable or income year in which the con-tract was completed.
Fill in the taxable or income year line at the top ofthe form to show the year of contract completion oradjustment for which the form is being filed.If you were an owner of an interest in a pass-through entity that has completed one or more long-term contracts, enter your taxable or income yearthat ends with or includes the end of the entity’s tax-able or income year in which the contract wascompleted.
GAlternative Minimum TaxableIncome
If you apply the percentage of completion method toincome from a long-term contract only for purposesof determining alternative minimum taxable income,you must apply the look-back method to the alterna-tive minimum taxable income in the year of contractcompletion. This rule applies whether or not you areliable for alternative minimum tax for the filing yearor for any prior taxable or income year.Interest is computed under the look-back method tothe extent your total tax liability (including the alter-native minimum tax liability) would have differed ifthe percentage of completion method had beenapplied using actual, rather than estimated, contractprice and contract costs.
HAmended Form FTB 3834
Individuals, limited liability companies, partnershipsand estates and trusts must file an amended formFTB3834 only if the amount shown on PartI, line6or PartII, line7 for any prior year changes as aresult of an error, an income tax examination or thefiling of an amended income tax return.
S corporations using Part II, the Simplified MarginalImpact Method, must complete form FTB3834 foreach completed long-term contract to compute theinterest due from or to be refunded to theScorporation as a result of the franchise tax. AnScorporatiion cannot file form FTB3834 on behalfof its shareholders. Shareholders of theScorporation must make a separate election and fileform FTB3834 using the applicable individual rates.
If more than three prior years are involved, checkthe box above PartI, Side1 of form FTB3834.Attach additional form(s) FTB3834 as needed. Donot sign the additional forms. Enter your name, iden-tifying number and taxable or income year. CompletePart1, line1 through line8; or PartII, line1 throughline9; but do not enter totals in column(d). Entertotals
in column(d) of the form FTB3834 thatyou sign.When applying the look-back method under specialsituations, such as:
delayed reapplication method;
treatment of amounts properly taken into accountafter contract completion; and
ten percent method;follow the instructions in federal Form 8697.
Specific Line InstructionsPart I — Regular Method
Use Part I only if you are not electing, do not havean election in effect, or are not required to use thesimplified marginal impact method as described inGeneral Instruction B.
Columns (a), (b) and (c) –
Enter at the top of eachcolumn the ending month and year for each priortaxable or income year in which you were requiredto report income from the completed long-termcontract(s), and any other year affected.
Line 2 –
In each column, show a net increase toincome as a positive amount and a net decrease toincome as a negative amount.In figuring the net adjustment to enter in each col-umn on line 2, be sure to take into account anyother income and expense adjustments that mayresult from the increase (or decrease) to incomefrom long-term contracts (e.g., in the case of an indi-vidual, a change to adjusted gross income mayaffect investment expenses and medical expensesunder R&TC Section 17201; in the case of a corpo-ration, the apportionment percentage may beaffected by a change in the gross receipts includedin the sales factor).Attach separate schedules for regular taxableincome and alternative minimum taxable income thatinclude:
identification of each completed long-term con-tract by contract number, job name, or any otherreasonable method used in your records to iden-tify each contract;
the amount of income previously reported foreach contract based on estimated contract priceand costs for each prior year;
the amount of income for each contract allocableto each prior year based on actual contract priceand costs;
the net adjustment to income from long-termcontracts for each prior year; and