Under IRC 460, how is a long-term contract defined?

Under IRC 460, how is a long-term contract defined?

• A. Not begun until after the year
• B. Not completed within the taxable year the contract began
• C. Completed within two years
• D. Completed within the taxable year

Answer: (B)

The definition hinges on whether a project can be finished within the same tax year it starts. A long-term contract is one that is not completed within the taxable year in which it began. This distinction matters because long-term contracts use the percentage-of-completion method to recognize income and costs, rather than waiting to finish the entire project. For example, a contract started in year one and finished in year two is a long-term contract, since completion doesn’t occur in the year it began. Conversely, if the project is completed in the same year it begins, it is not treated as long-term. So the best choice states that the contract is not completed within the taxable year the contract began. The other statements don’t define long-term contracts in the IRC sense.

The definition hinges on whether a project can be finished within the same tax year it starts. A long-term contract is one that is not completed within the taxable year in which it began. This distinction matters because long-term contracts use the percentage-of-completion method to recognize income and costs, rather than waiting to finish the entire project.

For example, a contract started in year one and finished in year two is a long-term contract, since completion doesn’t occur in the year it began. Conversely, if the project is completed in the same year it begins, it is not treated as long-term.

So the best choice states that the contract is not completed within the taxable year the contract began. The other statements don’t define long-term contracts in the IRC sense.