Arkansas Administrative Code
Agency 006 - Department of Finance and Administration
Division 05 - Division of Revenues
1998-1 - Comprehensive Corporation Income Tax Regulations
Rule 26-51-718 - MODIFICATION OF APPORTIONMENT AND ALLOCATION
Rule 1.26-51-718(d) - Construction Contractors
Current through Register Vol. 49, No. 9, September, 2024
The following special rules are established with respect to the apportionment of income of construction contractors:
When a taxpayer uses the percentage of completion method of accounting for long-term contracts and has income from sources both inside and outside of Arkansas, the amount of business income derived from such long-term contracts from sources within Arkansas shall be determined pursuant to this regulation. A "long-term" construction contract covers a period in excess of one (1) year from the date of execution of the contract to the date on which the contract is finally completed.
Business income is apportioned to Arkansas by a three-factor formula consisting of property, payroll and sales for all construction. The total of the property plus payroll plus two times the sales percentage is divided by four to determine the apportionment percentage. The apportionment percentage is then applied to business income to determine the amount apportioned to Arkansas.
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 tax year) exceeds all expenditures made during the tax 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 tax year for use in each such contract.
Example:
A taxpayer using the percentage of completion method of accounting for long-term contracts entered into a long-term contract to build a structure for $9,000,000. The contract allowed three years for completion and, as of the end of the second income year, the taxpayer's books of account (kept on the accrual method) disclosed the following:
In computing the above expenditures, consideration was given to material and supplies on hand at the beginning and end of each tax year. It was estimated that the contract was 30% completed at the end of the first tax year and 80% completed at the end of the second tax year. The amount to be included as business income for the first tax year is $300,000 (30% of $9,000,000 or $2,700,000 less expenditures of $2,400,000 equals $300,000). The amount to be included as business income for the second tax year is $400,000 (50% of $9,000,000 or $4,500,000 less expenditures of $4,100,000 equals $400,000).
Property Factor. In general the numerator and denominator of the property factor shall be determined as set forth in ACA 26-51-710 to 26-51-712. However, the following special rules also apply:
(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 Arkansas shall be included in the numerator of the property factor.
Example 1: Taxpayer commenced a long-term construction project in Arkansas as of the beginning of a given year. By the end of its second year, its equity in the costs of production to be reflected in the numerator and denominator of its property factor for such year is computed as follows:
NOTE: It may be necessary to use monthly averages if yearly averages do not properly reflect the average value of the taxpayer's equity. See ACA 26-51-712.
Example 2: Same facts as in Example 1, except that progress billings exceeded construction costs. No negative value for the taxpayer's equity in the construction project is shown in 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.
Payroll Factor. In general, the numerator and denominator of the payroll factor shall be determined as set forth in ACA 26-51-713 and 26-51-714. However, the following special rules also apply:
(A) Compensation paid to 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 to employees who perform their services in a state to which their employer does not report them for unemployment tax purposes shall be attributed to the state in which the services are performed.
Example: A taxpayer engaged in a long-term contract in Arkansas sends several key employees to Arkansas to supervise the project. The taxpayer, for unemployment tax purposes, reports these employees to another state where the main office is maintained and where the employees' reside. For payroll factor purposes, the compensation is assigned to the numerator of Arkansas.
Sales Factor. In general, the numerator and denominator of the sales factor shall be determined as set forth in ACA 26-51-715 to 26-51-717. However, the following special rules also apply:
(A) Gross receipts derived from the performance of a contract are attributable to Arkansas if the construction project is located in Arkansas. If the construction project is located both inside and outside of Arkansas, the gross receipts attributable to Arkansas are based upon the ratio which construction costs for the project in Arkansas incurred during the tax year bear to the total construction costs for the entire project incurred during the tax year.
Example 1: A construction project was undertaken in Arkansas by a calendar year taxpayer. The following gross receipts (progress billings) were derived from the contract during the three tax years that the contract was in progress.
The gross receipts to be reflected in both the numerator and denominator of the sales factor for each of the three years are the amounts shown.
Example 2: A taxpayer contracts to build a dam on a river at a point which lies half within Arkansas and half within another state. During the taxpayer's first tax year, construction costs in Arkansas were $2,000,000. Total construction costs for the project during the tax year were $3,000,000. Gross receipts (progress billings) for the year were $2,400,000. Accordingly, gross receipts of $1,600,000 ($2,000,000/$3,000,000 x $2,400,000) are included in the numerator of the sales factor.
(B) 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 tax year.
Example: A taxpayer entered into a long-term construction contract. At the end of its current tax year (the second since starting the project), it estimated that the project was 30% completed. The bid price for the project was $9,000,000 and it had received $2,500,000 from progress billings as of the end of its current tax year. The amount of gross receipts to be included in the sales factor for the current tax year is $2,700,000 (30% of $9,000,000), regardless of whether the taxpayer uses the accrual method or the cash method of accounting for receipts and disbursements.
