Oregon Administrative Rules › Chapter 150 - DEPARTMENT OF REVENUE › Division 314 - INCOME TAXATION GENERALLY GENERAL PROVISIONS › Section 150-314-0353 - Apportionment for Long-Term Construction Contracts

Current through Register Vol. 63, No. 7, July 1, 2024
(1) This rule adopts a model regulation
			 recommended by the Multistate Tax Commission to promote uniform treatment of
			 this item by the states. If a taxpayer elects to use the percentage of
			 completion method of accounting, or the completed contract method of accounting
			 for long-term contracts, and has income from sources both within and without
			 this state, the amount of apportionable income derived from sources within this
			 state, including income from such long-term contracts, is determined pursuant
			 to this rule. In such cases, the first step is to determine what portion of the
			 taxpayer's income constitutes apportionable income and nonapportionable income
			 under ORS 314.610 and the rules
			 thereunder. Nonapportionable income is directly allocated to specific states
			 pursuant to the provisions of ORS
			 314.625 to
			 314.645. The apportionable
			 income of the taxpayer is divided between or among the states in which the
			 business is conducted pursuant to the property, payroll, and sales
			 apportionment factors set forth in this rule. The sum of (1) the items of
			 nonapportionable income directly allocated to this state, plus (2) the amount
			 of apportionable income attributable to this state, constitutes the taxpayer's
			 entire net income that is subject to tax. For definitions, rules, and examples
			 for determining apportionable and nonapportionable income, see ORS
			 314.610 and the rules
			 thereunder.
(2) Apportionment of
			 Apportionable Income.
(a) In General.
			 Apportionable income is apportioned to this state by use of the formula
			 provided in ORS 314.650 as it applies to the tax
			 year involved.
(b) Percentage of
			 Completion Method. Under this method of accounting for long-term contracts, the
			 amount to be included each year as apportionable income from each contract is
			 the amount by which the gross contract price that has been completed during the
			 taxable year exceeds all expenditures made during the taxable 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 taxable year for
			 use in each such contract.
Example
			 1
:
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 taxable year, the taxpayer's books
			 of account, kept on the accrual method, disclosed the following: [See PDF link
			 below.]
(c) Completed
			 Contract Method. Under this method of accounting, apportionable income derived
			 from long-term contracts is reported for the taxable year in which the contract
			 is finally completed and accepted. Therefore, a special computation is required
			 to compute the amount of apportionable income attributable to this state from
			 each completed contract (see section (3) below). Thus, all receipts and
			 expenditures applicable to such contracts, whether completed or not as of the
			 end of the taxable year, are excluded from apportionable income derived from
			 other sources. For example, income from short-term contracts, interest, rents,
			 royalties, etc., is apportioned by the regular three-factor formula of
			 property, payroll, and sales.
(d)
			 Property Factor. In general, the numerator and denominator of the property
			 factor is determined as set forth in ORS
			 314.655 and the rules
			 thereunder. However, the following special rules are also applicable:
(A) The average value of the taxpayer's costs
			 (including materials and labor) of construction in progress, to the extent such
			 costs exceed progress billings (accrued or received depending on whether the
			 taxpayer is on the accrual or cash basis for keeping its accounts) is included
			 in the denominator of the property factor. The value of any such construction
			 costs attributable to construction projects in this state are included in the
			 numerator of the property factor.
Example
			 2
:
The taxpayer commenced a long-term construction
			 project in this state as of the beginning of a given year. By the end of its
			 second taxable 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: [See PDF link below.]
Example
			 3
:
Same facts as in Example 2, except that progress
			 billings exceeded construction costs. No 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 included in the cost of construction.
(C) The property factor is computed in the
			 same manner regardless of which method of accounting for long-term contracts
			 the taxpayer has elected and is computed for each taxable year, even though
			 under the completed contract method of accounting, apportionable income is
			 computed separately (see section (3) below).
(e) Payroll Factor. In general the numerator
			 and denominator of the payroll factor is determined as set forth in ORS
			 314.660 and the rules
			 thereunder. However, the following special rules are also applicable:
(A) Compensation paid employees that is
			 attributable to a particular construction project is included in the payroll
			 factor, even though it is included in the cost of construction.
(B) Compensation paid to employees engaged in
			 performing services at a construction site are attributed to the state in which
			 the services are performed. Compensation paid all other employees is governed
			 by ORS 314.660(2).
Example 4
:
A taxpayer engaged in
			 a long-term contract in state X assigns several key employees to that state to
			 supervise the project. The taxpayer, for unemployment tax purposes, reports
			 these employees to state Y where the main office is maintained and where the
			 employees reside. For payroll factor purposes, such compensation is assigned to
			 the numerator of state X.
(C) The payroll factor is computed in the
			 same manner regardless of which method of accounting for long-term contracts
			 the taxpayer has elected and is computed for each taxable year, even though
			 under the completed contract method of accounting, apportionable income is
			 computed separately (see section (3) below).
(f) Sales Factor. In general, the numerator
			 and denominator of the sales factor is determined as set forth in ORS
			 314.665 and the rules
			 thereunder. 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 that construction costs for the project in this
			 state bear to the total of such construction costs for the entire project
			 during the taxable year. Any other method, such as engineering cost estimates,
			 may be used if it provides a reasonable apportionment.
Example 5
:
A construction
			 project was undertaken in this state by a calendar-year taxpayer that had
			 elected one of the methods of accounting for long-term contracts. The following
			 gross receipts (progress billings) were derived from the contract during the
			 three taxable years the contract was in progress. [See PDF link
			 below.]
Example 6
:
A
			 taxpayer contracts to build a dam on a river at a point that lies half within
			 this state and half within state X. During the taxpayer's first taxable year,
			 construction costs in this state were $2,000,000. Total construction costs for
			 the project during the taxable 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 = 66 2/3% x $2,400,000) are included
			 in the numerator of the sales factor.
(B) If the percentage of completion method is
			 used, the sales factor includes only that portion of the gross contract price
			 that corresponds to the percentage of the entire contract completed during the
			 taxable year.
Example 7
:
A
			 taxpayer that elected the percentage of completion method of accounting entered
			 into a long-term construction contract. At the end of its current taxable year
			 (the first since starting the project) it estimated that the project was 30
			 percent 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 taxable
			 year. The amount of gross receipts to be included in the sales factor for the
			 current taxable year is $2,700,000 (30 percent of $9,000,000), regardless of
			 whether the taxpayer uses the accrual method or the cash method for accounting
			 for receipts and disbursements.
(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
			 taxable year attributable to each contract.
Example
			 8
:
A taxpayer that entered into a long-term
			 construction contract elected the completed contract method of accounting. By
			 the end of its current taxable year (the second since starting the project) it
			 had billed and accrued on its books a total of $5,000,000. Of that amount,
			 $2,000,000 accrued in the first year the contract was undertaken, and
			 $3,000,000 accrued in the current year. The amount of gross receipts to be
			 included in the sales factor for the current taxable year is
			 $3,000,000.
Example 9
:
Same facts as in Example 8 except that the taxpayer keeps its books on the cash
			 basis and, as of the end of its current taxable year, had received only
			 $2,500,000 of the $3,000,000 billed during the current year. The amount of
			 gross receipts to be included in the sales factor for the current taxable year
			 is $2,500,000.
(D) The
			 sales factor, except as noted above in paragraphs (B) and (C), is computed in
			 the same manner regardless of which method of accounting for long-term
			 contracts the taxpayer has elected and is computed for each taxable year, even
			 though under the completed contract method of accounting, apportionable income
			 is computed separately.
(g) Apportionment Percentage. The
			 apportionment percentage provided in ORS
			 314.650 is applied to
			 apportionable income to establish the amount apportioned to Oregon.