Common use of Long-term manufacturing contracts Clause in Contracts

Long-term manufacturing contracts. (a) In general. Section 460 generally requires a taxpayer to determine the income from a long-term manufac- turing contract using the percentage- of-completion method described in § 1.460–4(b) (PCM). A contract not com- pleted in the contracting year is a long-term manufacturing contract if it involves the manufacture of personal property that is— (1) A unique item of a type that is not normally carried in the finished goods inventory of the taxpayer; or (2) An item that normally requires more than 12 calendar months to com- plete (regardless of the duration of the contract or the time to complete a de- liverable quantity of the item). (b) Unique—(1) In general. Unique means designed for the needs of a spe- cific customer. To determine whether an item is designed for the needs of a specific customer, a taxpayer must consider the extent to which research, development, design, engineering, re- tooling, and similar activities (custom- izing activities) are required to manu- facture the item and whether the item could be sold to other customers with little or no modification. A contract may require the taxpayer to manufac- ture more than one unit of a unique item. If a contract requires a taxpayer to manufacture more than one unit of the same item, the taxpayer must xx- xxxxxxx whether that item is unique by considering the customizing activities that would be needed to produce only the first unit. For the purposes of this paragraph (b), a taxpayer must con- sider the activities performed on its be- half by a subcontractor.