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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
prohibited from using the cash receipts and disbursements method of accounting under section 448a3, who meets the gross receipts test of section 448c and 1.4603b3 for the taxable year in which such contract is entered into. The look-back method, however, applies to the alternative minimum taxable income from a contract of this type, for those taxpayers subject to the AMT in taxable years prior to the filing taxable year in which the look-back method is required, unless the contract is exempt from required use of the percentage of completion method under section 56a3.
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iii For contracts entered into after December 31, 2017, in a taxable year ending after December 31, 2017, a taxpayers gross receipts are determined in the manner required by regulations under section 448c.

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i Based on this reapplication, the taxpayer determines the amount of taxable income and, when applicable, alternative minimum taxable income and modified taxable income under section 59Ac that would have been reported for each year prior to the filing year that is affected by contracts completed or adjusted in the filing year if the actual, rather than estimated, total contract price and costs had been used in applying the percentage of completion method to these contracts, and to any other contracts completed or adjusted in a year preceding the filing year.

2 i The taxpayer then must determine the amount of taxable income and, when applicable, alternative minimum taxable income and modified taxable income under section 59Ac that would have been reported for each affected tax year preceding the filing year if the percentage of completion method had been applied on the basis of actual contract price and contract costs in reporting income from all contracts completed or adjusted in the filing year and in any preceding year.

iv In general, because income under the percentage of completion method is generally reported as costs are incurred, the taxable income and, when applicable, alternative minimum taxable income and modified taxable income under section 59Ac, are recomputed
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only for each year in which allocable contract costs were incurred.

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ii Under the method described in this paragraph c3 actual method, a taxpayer first must determine what its regular and, when applicable, its alternative minimum tax and base erosion minimum tax liability would have been for each redetermination year if the amounts of contract income allocated in Step One for all contracts completed or adjusted in the filing year and in any prior year were substituted for the amounts of contract income reported under the percentage of completion method on the taxpayers original return or as subsequently adjusted on examination, or by amended return.

vi For purposes of Step Two, the income tax liability must be redetermined by taking into account all applicable additions to tax, credits, and net operating loss carrybacks and carryovers. Thus, the taxes, if any, imposed under sections 55 and 59A
relating to alternative and base erosion minimum tax, respectively must be taken into account.

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4 i A General rule.
The simplified marginal impact method is required to be used with respect to income reported from domestic contracts by a pass-through entity that is either a partnership, an S corporation, or a trust, and that is not closely held.
With respect to contracts described in the preceding sentence, the simplified marginal impact method is applied by the pass-through entity at the entity level. The pass-through entity determines the amount of any hypothetical underpayment or overpayment for a redetermination year using the highest rate of tax in effect for corporations under section 11. However, for redetermination years beginning before January 1, 2018, the pass-through entity uses the highest rates of tax in effect for corporations under section 11
and section 55b1. Further, the passthrough entity uses the highest rates of tax imposed on individuals under section 1 and section 55b1 if, at all times during the redetermination year involved that is, the year in which the hypothetical increase or decrease in income arises, more than 50 percent of the interests in the entity were held by individuals directly or through 1 or more pass-through entities.

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iii Example 7. X, a calendar year C
corporation, is engaged in the construction of real property under contracts that are completed within a 24-month period. Its average annual gross receipts for the prior 3-taxableyear period does not exceed $25,000,000. As permitted by section 460e1B, X uses the completed contract method CCM for regular tax purposes. However, X is engaged in the construction of commercial real property and, for years beginning before January 1, 2018, is required to use the percentage of completion method PCM
for alternative minimum tax AMT
purposes. Assume that for 2017, 2018, and 2019, X has only one long-term contract, which is entered into in 2017
and completed in 2019 and that in 2017
Xs average annual gross receipts for the prior 3-taxable-years do not exceed $10,000,000. Assume further that X
estimates gross income from the contract to be $2,000, total contract costs to be $1,000, and that the contract is 25 percent complete in 2017 and 70
percent complete in 2018, and 5 percent complete in 2019. In 2019, the year of completion, gross income from the contract is actually $3,000, instead of $2,000, and costs are actually $1,000.
Because X was required to use the PCM
for 2017 for AMT purposes, X must apply the look-back method to its AMT
reporting for that year. X has elected to use the simplified marginal impact method. For 2017, Xs income using estimated contract price and costs is as follows:

TABLE 1 TO PARAGRAPH h8iii Estimates Gross Income
Deductions
Contract Income PCM.

2017
$500 = $2,000
25%
$250 = $1,000
25%
$250

A When X files its federal income tax return for 2019, the contract completion year, X applies the lookback method. For 2017, Xs income using actual contract price and costs is as follows:

TABLE 2 TO PARAGRAPH h8iiiA
Actual Gross Income
Deductions
Contract Income PCM.

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05JAR1

2017
$750 = $3,000
25%
$250 = $1,000
25%
$500