Current through Register Vol. 35, No. 18, September 24, 2024
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.
