NECESSITY, FUNCTION, AND CONFORMITY:
141.120 provides for the division of income
of interstate business for tax purposes.
131.130(1) authorizes the
department to promulgate administrative regulations to administer and interpret
Kentucky's tax laws. This administrative regulation explains how the
apportionable income allocation and apportionment factors shall be calculated
when net income is reported on a completed contract basis.
(1) "Completed contract method of accounting"
means a method of accounting whereby apportionable income from long-term
contracts is reported for the taxable year in which the contract is finally
completed and accepted.
contract price" means the percentage of the entire contract that has been
completed, from the commencement of the contract to the date of withdrawal,
dissolution, or cessation of business.
(3) "Long-term contracts" means contracts
covering 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 and
General. If a corporation uses the completed contract method of accounting, the
apportionable income earned within Kentucky shall be determined by the use of
the apportionment factor determined pursuant to
141.120, as modified by the special rules for
ap-portionable income derived from long term contracts established in Sections
3 to 5 of this administrative regulation.
Sales Factor. The numerator and
denominator of the sales factor shall be determined pursuant to
and the following
(1) Gross receipts derived
from the performance of a contract shall be attributable to Kentucky if the
construction project is located in Kentucky. If the construction project is
located partly within and partly without Kentucky, the gross receipts
attributable to Kentucky shall be based upon the ratio which construction costs
for the project in Kentucky incurred during the taxable year bear to the total
of construction costs for the entire project during the taxable year.
(2) The sales factor shall include the
portion of the gross receipts (progress billings) received or accrued,
whichever is applicable, during the taxable year attributable to each
(1) The completed contract method of
accounting shall require that the reporting of income (or loss) be deferred
until the year in which the construction project is completed or
(2) Accordingly, a
separate computation shall be made for each contract completed during the
taxable year, regardless of whether the project is located within or without
Kentucky, to determine the amount of income, which is attributable to sources
(3) The amount of
income from each contract completed during the taxable year apportioned to this
state, plus other apportionable income apportioned to this state such as
interest income, rents, royalties, income from short-term contracts, etc., plus
all non-apportionable income allocated to Kentucky, shall be the measure of tax
for the taxable year.
amount of income (or loss) from each contract which is derived from sources
within Kentucky using the completed contract method of accounting shall be
computed as follows:
(a) The amount of income
(or loss) shall be determined in the taxable year in which the contract is
The income (or loss)
determined by paragraph (a) of this subsection shall be apportioned to Kentucky
by the following method:
1. A fraction shall
be determined for each year during which the contract was in progress. The
numerator shall be the amount of construction costs paid or accrued in each
year during which the contract was in progress and the denominator shall be the
total of all construction costs for the project.
2. The amount of total income (or loss) from
the contract determined under paragraph (a) of this subsection shall be
multiplied by the total percentage determined by subparagraph 1 of this
paragraph. The resulting income (or loss) shall be the amount of apportionable
income from the contract derived from sources within Kentucky.
Computation for Year of Withdrawal, Dissolution or Cessation of Business.
(1) Use of the completed contract method of
accounting shall require that income derived from sources within Kentucky from
incomplete contracts in progress outside Kentucky on the date of withdrawal,
dissolution, or cessation of business in Kentucky be included in the measure of
tax for the taxable year during which the corporation withdraws, dissolves, or
ceases doing business in this state.
The amount of income (or loss) from each
contract to be apportioned to Kentucky by the apportionment method established
in Section 4(4)(b) of this administrative regulation shall be determined as
(a) The amount of apportionable
income (or loss) for each contract shall be the amount by which the gross
contract price from each contract exceeds all expenditures made during the
period in connection with each contract.
(b) In so doing, account shall be taken of
the material and supplies on hand at the beginning and end of the taxable year
for use in each contract.