Which guidance item is included in Notice 89-15?

Which guidance item is included in Notice 89-15?

• A. Allocation of costs to contracts
• B. Aggregating and severing contracts
• C. Small home and residential construction contracts
• D. Changes in method of accounting

Answer: (A)

Notice 89-15 focuses on how a contractor should allocate costs to individual contracts for tax and financial reporting purposes. The key idea is to assign both direct costs and a reasonable portion of indirect costs (overhead) to each contract so the profitability shown for that contract reflects the actual resources used. This careful allocation is essential for proper revenue recognition under the applicable accounting method and helps prevent cross-contract cost shifting. That’s why allocating costs to contracts is the guidance described in Notice 89-15. The other topics—aggregating and severing contracts, small home and residential construction contracts, and changes in method of accounting—are not the focus of this notice and are addressed by different guidance.

Notice 89-15 focuses on how a contractor should allocate costs to individual contracts for tax and financial reporting purposes. The key idea is to assign both direct costs and a reasonable portion of indirect costs (overhead) to each contract so the profitability shown for that contract reflects the actual resources used. This careful allocation is essential for proper revenue recognition under the applicable accounting method and helps prevent cross-contract cost shifting. That’s why allocating costs to contracts is the guidance described in Notice 89-15. The other topics—aggregating and severing contracts, small home and residential construction contracts, and changes in method of accounting—are not the focus of this notice and are addressed by different guidance.