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. 6, June, 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:
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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:
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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.
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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.