N.M. Admin. Code § 3.5.19.12

Current through Register Vol. 35, No. 17, September 10, 2024

Section 3.5.19.12 - SPECIAL RULES - CONSTRUCTION CONTRACTORS

A. The special rules established in Section 3.5.19.12 NMAC apply to the apportionment of income of long-term construction contractors.

B.In general. When a taxpayer elects to use the percentage of completion method of accounting, or the completed contract method of accounting for long-term contracts (construction contracts covering a period in excess of one year from the date of execution of the contract to the date on which the contract is finally completed and accepted), and has income from sources both within and without this state from a trade or business, the amount of business income derived from such long-term contracts from sources within this state shall be determined pursuant to this section. In such cases, the first step is to determine which portion of the taxpayer's income constitutes "business income" and which portion constitutes "nonbusiness income" under Section 7-4-2 NMSA 1978 and Sections 3.5.1.9 and 3.5.1.10 NMAC. Nonbusiness income is directly allocated to specific states pursuant to the provisions of Section 7-4-5 through 7-4-9 NMSA 1978, inclusive. Business income is apportioned among the states in which the business is conducted pursuant to the property, payroll, and sales apportionment factors set forth in this section. The sum of (1) the items nonbusiness income directly allocated to this state and (2) the amount of business income attributable to this state constitutes the amount of the taxpayer's entire net income which is subject to tax by this state.

C.Business and nonbusiness income. For definitions and rules for determining business and nonbusiness income, see Sections 3.5.1.9 and 3.5.1.10 NMAC.

D.Methods of accounting and year of inclusion. New Mexico follows the Internal Revenue Code with respect to general rules of accounting, definitions and methods of accounting for long-term construction contracts.

E. Apportionment of business income.

(1) In general. Business income is apportioned to this state by a three-factor formula consisting of property, payroll and sales regardless of the method of accounting for long-term contracts elected by the taxpayer. The total of the property, payroll and sales percentages is divided by three to determine the amount apportioned to this state.

(2) Percentage of completion method. Under this method of accounting for long-term contracts, the amount to be included each year as business income from each contract is the amount by which the gross contract price which corresponds to the percentage of the entire contract which has been completed during the income year exceeds all expenditures made during the income year in connection with the contract. In so doing, account must be taken of the material and supplies on hand at the beginning and end of the income year for use in each such contract.

(3) Completed contract method. Under this method of accounting business income derived from long-term contracts is reported for the income year in which the contract is finally completed and accepted. Therefore, a special computation is required to compute the amount of business income attributable to this state from each completed contract. Thus, all receipts and expenditures applicable to such contracts whether complete or incomplete as of the end of the income year are excluded from business income derived from other sources, as for example, short-term contracts, interest, rents, royalties, etc., which is apportioned by the regular three-factor formula of property, payroll and sales.

(4) Property factor. In general the numerator and denominator of the property factor shall be determined as set forth in Sections 7-4-11, 7-4-12 and 7-4-13 NMSA 1978, inclusive, and Sections 3.5.11.8 through 3.5.11.11, 3.5.12.8, 3.5.12.9 and 3.5.13.8 NMAC inclusive. However, the following special rules are also applicable.

(a) The average value of the taxpayer's cost (including materials and labor of construction in progress, to the extent that such costs exceed progress billings (accrued or received, depending on whether the taxpayer is on the accrual or cash basis for keeping its accounts) shall be included in the denominator of the property factor. The value of any such construction costs attributable to construction projects in this state shall be included in the numerator of the property factor.

(b) Rent paid for the use of equipment directly attributable to a particular construction project is included in the property factor at eight times the net annual rental rate even though such rental expense may be capitalized into the cost of construction.

(c) The property factor is computed in the same manner for all long-term contract methods of accounting and is computed for each income year even though under the completed contract method of accounting, business income is computed separately (see Subsection F of this section below).

(5) Payroll factor. In general the numerator and denominator of the payroll factor shall be determined as set forth in Section 7-4-14 and 7-4-15 NMSA 1978 and Sections 3.5.14.8 through 3.5.14.13 and 3.5.15.8 NMAC. However, the following special rules are also applicable:

(a) Compensation paid employees which is attributable to a particular construction project is included in the payroll factor even though capitalized into the cost of construction.

(b) Compensation paid employees who in the aggregate perform most of their services in a state to which their employer does not report them for unemployment tax purposes, shall nevertheless be attributed to the state in which the services are performed.

(c) The payroll factor is computed in the same manner for all long-term contract methods of accounting and is computed for each income year even though, under the completed contract method of accounting, business income is computed separately (see Subsection F of this section below).

(6) Sales factor. In general, the numerator and denominator of the sales factor shall be determined as set forth in Sections 7-4-16 through 7-4-18 NMSA 1978, inclusive, and Sections 3.5.16.8 through 3.5.16.10, 3.5.17.8, 3.5.17.9 and 3.5.18.8 NMAC, inclusive. However, the following special rules are also applicable:

(a) Gross receipts derived from the performance of a contract are attributable to this state if the construction project is located in this state. If the construction project is located partly within and partly without this state, the gross receipts attributable to this state are based upon the ratio which construction costs for their project in this state incurred during the income year bear to the total of construction costs for the entire project during the income year, or upon any other method, such as engineering cost estimates, which will provide a reasonable apportionment.

(b) If the percentage of completion method is used, the sales factor includes only that portion of the gross contract price which corresponds to the percentage of the entire contract which was completed during the income year.

(c) If the completed contract method of accounting is used, the sales factor includes the portion of the gross receipts (progress billings) received or accrued, whichever is applicable, during the income year attributable to each contract.

(d) The sales factor, except as noted above in items 2 and 3 above, is computed in the same manner, regardless of which long-term method of accounting the taxpayer has elected, and is computed for each income year even though, under the completed contract method of accounting, business income is computed separately.

(7) Apportionment percentage. The total of the property, payroll and sales percentages is divided by three to determine the apportionment percentage. The apportionment percentage is then applied to business income to establish the amount apportioned to this state.

F.Completed contract methods - special computation. The completed contract method of accounting requires that the reporting of income (or loss) be deferred until the year in which the construction project is completed or accepted. Accordingly, a separate computation is made for each such contract completed during the income year, regardless of whether the project is located within or without this state, in order to determine the amount of income which is attributable to sources within this state. The amount of income from each contract completed during the income year apportioned to this state plus other business income apportioned to this state by the regular three-factor formula such as interest income, rents, royalties, income from short-term contracts, etc. plus all nonbusiness income allocated to this state is the measure of tax for the income year. The amount of income (or loss) from each contract which is derived from sources within this state using the completed contract method of accounting is computed as follows:

(1) in the income year in which the contract is completed, the income (or loss) therefrom is determined; and then

(2) the income (or loss) determined at Paragraph (1) of this subsection is apportioned to this state by the following method:

(a) a fraction is determined for each year during which the contract was in progress; the numerator is the amount of construction costs paid or accrued in each year during which the contract was in progress and the denominator is the total of all such construction costs for the project;

(b) each percentage determined in 1 above is multiplied by the apportionment formula percentage for that year as determined in Paragraph (7) of Subsection E of this section;

(c) the percentages determined at Subparagraph (b) of this paragraph for each year during which the contract was in progress are totaled; the amount of total income (or loss) from the contract determined at Paragraph (1) of this subsection is multiplied by the total percentage; the resulting income (or loss) is the amount of business income from such contract derived from sources within this state.

G.Computation for year of withdrawal, dissolution or cessation of business - completed method.

(1) Use of the completed contract method of accounting for long-term contracts requires that income derived from sources within this state from incomplete contracts in progress outside this state on the date of withdrawal, dissolution or cessation of business in this state be included in the measure of tax for the taxable year during which the corporation withdraws, dissolves or ceases doing business in this state.

(2) The amount of income (or loss) from each such contract to be apportioned to this state by the apportionment method set forth in Paragraph (2) of Subsection F of this section shall be determined as if the percentage of completion method of accounting were used for all such contracts on the date of withdrawal, dissolution or cessation of business. The amount of business income (or loss) for each such contract shall be the amount by which the gross contract price from each such contract which corresponds to the percentage of the entire contract which has been completed from the commencement thereof to the date of withdrawal, dissolution or cessation of business exceeds all expenditures made during such period in connection with each such contract. In so doing, one must take into account the material and supplies on hand at the beginning and end of the income year for use in each such contract.

H. The provisions of this version of this section retroactively apply to any taxable year beginning on or after January 1, 1996.

N.M. Admin. Code § 3.5.19.12

12/29/89, 9/20/93, 7/15/96; 3.5.19.12 NMAC - Rn & A, 3 NMAC 5.19.12, 6/29/01