New Mexico Administrative Code › Title 3 - TAXATION › Chapter 5 - UNIFORM DIVISION OF INCOME FOR TAX PURPOSES › Part 19 - EQUITABLE ADJUSTMENT OF STANDARD ALLOCATION OR APPORTIONMENT › Section 3.5.19.12 - SPECIAL RULES - CONSTRUCTION CONTRACTORS

Current through Register Vol. 35, No. 13, July 16, 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.