Hawaii Administrative Rules › Title 18 - DEPARTMENT OF TAXATION › Chapter 235 - INCOME TAX LAW › Subchapter 2 - DIVISION OF INCOME FOR TAX PURPOSES › Section 18-235-38-06.03 - Construction contractors

Current through June, 2024
(a) These rules
				apply to a taxpayer that uses the percentage of completion method or the
				completed contract method to account for income from 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).
(1) Every taxpayer
				shall determine how much of the taxpayer's income for the year constitutes
				nonbusiness income, and how much constitutes business income, under section
				235-21, HRS, and the
				rules that interpret that section.
(2) Nonbusiness income is directly allocated
				to Hawaii under sections
				235-25 to
				235-28,
				HRS, and the rules that interpret those provisions.
(3) For a taxpayer using the percentage of
				completion method described in subsection (d)(2), the taxpayer's business
				income (including income from long-term contracts that is allocable to the
				year) is apportioned to Hawaii using the three-factor formula in section
				235-29,
				HRS, where the factors are modified as follows:
(A) The rules in subsection (d)(4) apply to
				the property factor, in order to take into account the taxpayer's investment in
				a construction project in progress;
(B) The rules in subsection (d)(5) apply to
				the payroll factor; and
(C) The
				rules in subsection (d)(6), including subsection (d)(6)(B), apply to the sales
				factor in order to take into account receipts from long-term
				contracts.
(4) For a
				taxpayer using the completed contract method described in subsection (d)(3):
(A) The taxpayer's business income (not
				including business income from long-term contracts) is apportioned to Hawaii
				using the three-factor formula in section
				235-29,
				HRS, where the factors are modified as follows:
(i) The rules in subsection (d)(4) modify the
				property factor to take into account the taxpayer's investment in a
				construction project in progress;
(ii) The rules in subsection (d)(5) apply to
				the payroll factor; and
(iii) The
				rules in subsection (d)(6), including subsection (d)(6)(C), apply to the sales
				factor in order to take into account receipts from long-term contracts;
				and
(B) Business income
				from each long-term contract is separately apportioned as follows:
(i) Income from each long-term contract
				completed during the year is apportioned to Hawaii using the method described
				in subsection (e), which uses a weighted average of the factors determined
				under subparagraph (A) for each year the contract was in progress;
(ii) If the taxpayer dissolves, withdraws, or
				otherwise ceases doing business in Hawaii during the year, income from each
				incomplete contract shall be taken into account and apportioned to Hawaii using
				the method described in subsection (f), which uses a weighted average of the
				factors determined under subparagraph (A) for each year the contract was in
				progress; or
(iii) Otherwise,
				income from each long-term contract that is not completed during the year is
				not taken into account in that year.
(5) The sum of:
(A) The items of nonbusiness income directly
				allocated to Hawaii under paragraph (2), and
(B) The amount of business income apportioned
				to Hawaii under paragraph (3) or (4), is the amount of the taxpayer's income
				that is subject to net income tax by Hawaii.