Form 8697: Look-Back Method for Long-Term Contracts
Published November 7, 2026
Form 8697 figures the interest that applies under the look-back method for certain long-term contracts. The method is in section 460(b)(2) of the Internal Revenue Code. The form computes the net interest owed to the IRS, or due to the taxpayer, on contracts accounted for under a percentage-of-completion method.
This post is general information from the December 2025 revision of Form 8697 and its instructions. For the detailed computations and examples, the instructions point to Regulations section 1.460-6. For guidance on the percentage-of-completion methods, they cite Regulations section 1.460-4.
Who must file
You must file Form 8697 for each tax year in which you completed a long-term contract. The contract must have been entered into after February 28, 1986. You accounted for it under the percentage-of-completion method or the percentage-of-completion capitalized cost method.
You also file it for any later year in which the contract amount or contract costs of such a contract are adjusted.
Pass-through entities
A partnership, S corporation, or trust that is not closely held must apply the look-back method at the entity level. This applies to any contract where at least 95% of the gross income comes from U.S. sources.
An entity is closely held if, during a tax year with income under the contract, 50% or more of its beneficial interests are held by five or fewer persons. The instructions say that counts direct and indirect ownership. They use rules similar to the constructive ownership rules of section 1563(e).
Which part to use
- Part I is the regular method. Use it if no election is in effect and you are not required to use the simplified marginal impact method.
- Part II is the simplified marginal impact method, or SMIM.
The instructions say Part II is used only by pass-through entities that must apply the method at the entity level. Taxpayers who elect the SMIM, or have an election in effect, also use Part II.
Under the SMIM, prior-year amounts use an assumed marginal tax rate. That rate is generally the highest statutory rate in effect for that year. The instructions say this avoids refiguring your tax from the actual contract amount and costs each time.
To elect the SMIM, attach a statement to a timely filed income tax return, with extensions, for the first year of the election. The statement says you elect under Regulations section 1.460-6(d). Once made, the election applies to all later years. The IRS must consent before the election can be revoked.
Each column in Part I is for a prior tax year. In that year you had to report income from the completed contract. Columns also cover any other tax year affected by those years. If there are more than two prior years, attach more sheets.
Mid-contract change
When a C corporation converts into an S corporation during a contract, the look-back method applies at the entity level. It applies to contracts entered into before the conversion. This is true whether or not the S corporation is considered closely held.
Where the interest goes
Attach Form 8697 to your income tax return. The signature section does not have to be completed by you or by a paid preparer.
Individuals include interest due on the Schedule 2 (Form 1040) line named in the instructions. A partnership that is not closely held includes it on Form 1065, line 24. An S corporation that is not closely held includes it in the additional taxes amount on Form 1120-S, line 23c, for the 2025 form year.
Corrected returns
When you complete a corrected Form 8697, the instructions say to carry certain figures from the original form. For example, carry adjusted taxable income from Part I, line 3 of the original.
Sources: Sources: IRS, Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts (Rev. December 2025) (https://www.irs.gov/pub/irs-pdf/f8697.pdf); Instructions for Form 8697 (Rev. December 2025) (https://www.irs.gov/pub/irs-pdf/i8697.pdf) This is general information, not advice about your specific return.
