Or. Admin. R. 150-314-0353 - Apportionment for Long-Term Construction Contracts
(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 รท$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.
(3) Completed
Contract Method - Special Computation. The completed contract method of
accounting requires that the reporting of income (or loss) be deferred until
the year the construction project is completed and accepted. Accordingly, a
separate computation is made for each such contract completed during the
taxable year regardless of whether the project is located within or without
this state in order to determine the amount of income attributable to sources
within this state. The amount of income apportioned to this state from each
contract completed during the taxable year, plus other apportionable income
(such as interest income, rents, royalties, income from short-term contracts,
etc.) apportioned to this state by the regular three factor formula, plus all
nonapportionable income allocated to this state, is the measure of tax for the
taxable year. The amount of income (or loss) from each contract derived from
sources within this state using the completed contract method of accounting is
computed as follows:
(a) In the taxable year
the contract is completed, the income (or loss) therefrom is
determined.
(b) The income (or
loss) determined in (a) is apportioned to this state by the following method:
(A) A fraction is determined for each year
the contract was in progress. The numerator is the amount of construction costs
paid or accrued each year the contract was in progress, and the denominator is
the total of all such construction costs for the project.
(B) Each percentage determined in (A) is
multiplied by the apportionment formula percentage for that particular year as
determined in section (2)(g) of this rule.
(C) The products determined at (B) for each
year the contract was in progress are totaled. The amount of total income (or
loss) from the contract determined in (a) is multiplied by the total
percentage. The resulting income (or loss) is the amount of apportionable
income from such contract derived from sources within this state.
Example 10: A taxpayer using the
completed contract method of accounting for long-term contracts is engaged in
three long-term contracts: Contract L in this state, Contract M in state X, and
Contract N in state Y. In addition, it has other apportionable income (less
expenses) during the taxable year 2016 from interest, rents, and short-term
contracts amounting to $500,000, and nonapportionable income allocable to this
state of $8,000. During 2016, it completed Contract M in state X at a profit of
$900,000. Contracts L in this state and N in state Y were not completed during
the taxable year. The apportionment percentages of the taxpayer as determined
in subsection (g) of this rule and the percentages of contract costs as
determined in subsection (b) above for each year Contract M in state X was in
progress are as follows: [See PDF link below.]
Example 11: Same facts as in
Example 10 except that Contract L was started in 2016 in this state, the first
year the taxpayer was subject to tax in this state. Contract L in this state
and Contract N in state Y are incomplete in 2016. The corporation's net income
subject to tax in this state for 2016 is computed as follows: [See PDF link
below.]
Example 12:
Same facts as in Example 10 except that the figures relate to Contract L in
this state, and 2016 is the first year the corporation was taxable in another
state (see ORS
314.615
and
314.620
and the rules thereunder). Contracts M and N in states X and Y were started in
2016 and are incomplete. The corporation's net income subject to tax in this
state for 2016 is computed as follows: [See PDF link
below.]
(4) Computation for Year of Withdrawal,
Dissolution or Cessation of Business - Completed Contract Method. Use of the
completed contract method of accounting for long-term contracts requires that
income derived from sources within this state from incomplete contracts in
progress outside this state on the date of withdrawal, dissolution, or
cessation of business in this state 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 such contract
to be apportioned to this state by the apportionment method set forth in
section (3)(b) of this rule must be determined as if the percentage of
completion method of accounting were used for all such contracts on the date of
withdrawal, dissolution, or cessation of business. The amount of apportionable
income (or loss) for each such contract is the amount by which that portion of
the gross contract price of each such contract that corresponds to the
percentage of the entire contract that has been completed as the date of
withdrawal, dissolution, or cessation of business exceeds all expenditures made
in connection with each such 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.
Example
13: A construction contractor qualified to do
business in this state elected the completed contract method of accounting for
long-term contracts. It was engaged in two long-term contracts. Contract L was
started in Oregon in 2014 and completed at a profit of $900,000 on December 16,
2016. The taxpayer withdrew on December 31, 2016. Contract M was started in
state X in 2015 and was incomplete on December 31, 2016. The apportionment
percentages of the taxpayer as determined in section (2) of this rule, and
percentages of construction costs as determined in section (3)(b) of this rule
for each year during which Contract M in state X was in progress are as
follows: [See PDF link below.]
Notes
To view tables referenced in rule text, click here to view rule.
Statutory/Other Authority: ORS 305.100
Statutes/Other Implemented: ORS 314.615
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