CCA explains accounting methods for manufacturers' long-term contracts

Plain-English summary

Chief Counsel Advice addressed whether a manufacturer may use the completed contract method for its contracts. A contract to produce a unique item, or an item normally requiring more than 12 months to produce, is generally a long-term contract that must use the percentage-of-completion method when it will not be completed in one tax period. A contract for an item that is neither unique nor expected to take more than 12 months is not a long-term contract and may generally use an accrual method. The completed contract method is available for long-term contracts exempt from the percentage-of-completion method, such as qualifying home construction contracts and certain smaller construction contractors' contracts.

Ruling snapshot

• Question: When may a manufacturer use the completed contract method instead of the percentage-of-completion method?
• Outcome: Advice given
• Key authorities: IRC § 460(a) and (f)(2); Treas. Reg. §§ 1.460-2(b)(2) and 1.460-4(c)

Full text (IRS public release)

ID: CCA-116110-12 Number: 201222036
Release Date: 6/1/2012
Office:
UILC: 460.05-01

From: ----------------------
Sent: Thursday, January 26, 2012 11:04 AM
To: --------------
Cc: ----------------------
Subject: Manufacturer’s Method of Accounting

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Please note that under current law manufacturers generally are not entitled to use the completed contract method of accounting (CCM). If the manufacturer's contract requires it to produce a "unique" item or one normally requiring more than 12 months to produce and the contract will not be completed within a single tax period, the contract is a long-term contract and generally must be accounted for under the percentage-of-completion method (PCM). See IRC sec. 460(f)(2), (a). On the other hand, if the item normally does not require more than 12 months to produce and is not unique (e.g., because one of the "safe harbors" in regulation section 1.460-2(b)(2) is met), then the contract is not a long-term contract and PCM need not be used. Under these circumstances, the manufacturer can account for the contract under an accrual method. CCM, however, can only be used to account for long-term contracts that are exempt from PCM (not contracts that do not qualify as long-term contracts). See Treas. Reg. Sec. 1.460-4(c). The primary examples of such "exempt" long-term contracts, which may be accounted for under CCM, are home construction contracts and the contracts of construction contractors with average annual gross receipts of less than $10 million that are expected to be completed within two years.

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