For taxable years beginning on or after January 1, 2011 and before January 1, 2013, under Revenue and Taxation Code section 25128.5, an apportionable trade or business, other than that described in subdivision (b) of Section 25128, Revenue and Taxation Code, could have made an irrevocable annual election on an original timely filed return to apportion its income to this state by multiplying its business income by the sales factor.
For taxable years beginning on or after January 1, 2013, under Revenue and Taxation Code section 25128.7, an apportionable trade or business, other than that described in subdivision (b) of Section 25128, Revenue and Taxation Code, shall apportion its income to this state by multiplying its business income by the sales factor.
Example 1:
Taxpayer commenced building a ship in this state under a long-term contract 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:
1st Year | 2nd Year | |||
Beginning | Ending | Beginning | Ending | |
Project Costs.............................................................................................. | ..........................0 | $1,000,000 | ||
Progress billings..................................................................................................................... | 600,000 | |||
Balance 12/31-( 1/1).......................... | ..........................$400,000 | $400,000 | ||
Total project costs from beginning of project................................................................................................................................ | ..........................$5,000,000 | |||
Total progress billings from beginning of project.......................................................................................................................................................................... | 4,000,000 | |||
Balance 12/31 ......................................................................................................................................................... | 1,000,000 | |||
Balance beginning of year.............................................................................................................................................................................................................. | 400,000 | |||
Total................................................................................................................................................................................................................................................... | $1,400,000 | |||
Average ( 1/2)--Value (*) used in property factor................................................................................................................................... | $700,000 |
(*) It may be necessary to use monthly averages if yearly averages do not properly reflect the average value of the taxpayer's equity; see Revenue and Taxation Code section 25131 and the regulations thereunder.
Example 2:
Same facts as in Example 1, except that progress billings exceeded project costs. No value for the taxpayer's equity in the project is shown in the property factor.
Example:
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.
Example 1:
A ship building project was undertaken in this state by a calendar year taxpayer, which had elected one of the long-term contract methods of accounting. The following gross receipts were derived from the contract during the three taxable years the contract was in progress.
1st Year | 2nd Year | 3rd Year | |
Gross Receipts.......................... | $1,000,000 | $4,000,000 | $3,000,000 |
The gross receipts to be reflected in both the numerator and denominator of the sales factor for each of the three years are the amounts shown.
Example 2:
A taxpayer contracts to build a dam on a river at a point, which 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 for the year were $2,400,000. Accordingly, gross receipts of $1,600,000 ($1,600,000 = 66 2/3% X $2,400.000) are included in the numerator of the sales factor.
Example:
A taxpayer which had elected the percentage of completion method of accounting entered into a long-term contract. At the end of its current taxable year (the first since starting the project) it estimated that the project was 30% 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% of $9,000,000), regardless of whether the taxpayer uses the accrual method or the cash method for accounting for receipts and disbursements.
Example 1:
A taxpayer which had elected the completed contract method of accounting entered into a long-term contract. 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 which $2,000,000 had accrued in the first year the contract was undertaken, and $3,000,000 had accrued in the current (second) year. The amount of gross receipts to be included in the sales factor for the current taxable year is $3,000,000.
Example 2:
Same facts as in Example 1 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.
For taxable years beginning on or after January 1, 2011 and before January 1, 2013, under Revenue and Taxation Code section 25128.5, any apportionable trade or business, other than that described in subdivision (b) of Section 25128, Revenue and Taxation Code, could have made an irrevocable annual election on an original timely filed return to apportion its income to this state by multiplying its business income by the sales factor.
For taxable years beginning on or after January 1, 2013, under Revenue and Taxation Code section 25128.7, an apportionable trade or business, other than that described in subdivision (b) of Section 25128, Revenue and Taxation Code, shall apportion its income to this state by multiplying its business income by the sales factor.
The amount of income (or loss) from each contract which is derived from sources within this state using the completed contract method of accounting is used, is computed as follows:
Example 1:
A taxpayer, not engaged in a "qualified business activity" as defined in California Code of Regulations, title 18, section 25128(b) 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 business income (less expenses) during the income year 1992 from interest, rents and short-term contracts amounting to $500,000, and nonbusiness income allocable to this state of $8,000. During 1992 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 income year. The apportionment percentages of the taxpayer as determined in subsection (d)(7) of this regulation and the percentages of contract costs as determined in subsection (e)(2) above for each year Contract M in state X was in progress are as follows:
1990 | 1991 | 1992 | |
Apportionment percentages for this state................................................................................................ | 30% | 20% | 40% |
Percentage of project costs of Contract M each year to total project costs--(100%).......................... | 20% | 50% | 30% |
The corporation's net income subject to tax in this state for 1992 is computed as follows:
Business Income (excluding income from Contract M)...................................... | $500,000 |
Apportion 40% to this state................................................................................... | $200,000 |
Add: Income from Contract M *..................................... | $252,000 |
Total business income derived from sources within this state.......................... | 452,000 |
Add: Nonbusiness income allocated to this state................................................ | 8,000 |
Net income subject to tax....................................................................................... | $460,000 |
* Income from Contract M apportioned to this state:
1990 | 1991 | 1992 | Total | |
Apportionment percentage for this state.......................... | 30% | 20% | 40% | |
Percent of project costs..................................................... | 20% | 50% | 30% | 100% |
Product................................................................................ | 6.00% | 10.00% | 12.00% | 28% |
28% of $900,000 = $252,000. |
Example 2:
Same facts as in Example 1 except that Contract L was started in 1992 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 1992. The corporation's net income subject to tax in this state for 1992 is computed as follows:
Business Income (excluding income from Contract M).......................... | $500,000 |
Apportion 40% to this state.......................... | 200,000 |
Add: Income from Contract M *.......................... | 108,000 |
Total business income derived from sources within this state.......................... | $308,000 |
Add: Nonbusiness income allocated to this state.......................... | 8,000 |
Net income subject to tax.......................... | $316,000 |
* Income from Contract M apportioned to this state:
1990 | 1991 | 1992 | Total | |
Apportionment percentage for this state.......................... | 0 | 0 | 40% | |
Percent of project costs.......................... | 20% | 50% | 30% | |
Product.......................... | 0 | 0 | 12.0% | 12.0% |
* 12% of $900,000 = $108,000. |
NOTE: The percentage of 12% used to determine the income derived from sources within this state reflects the fact that the corporation was not subject to tax in this state prior to 1992.
Example 3:
Same facts as in Example 1 except that the figures relate to Contract L in this state and 1992 is the first year the corporation was taxable in another state (See Revenue and Taxation Code sections 25121 and 25122 and the regulations thereunder). Contracts M and N in states X and Y were started in 1992 and are incomplete.
The corporation's net income subject to tax in this state for 1992 is computed as follows:
Business Income (excluding income from Contract L).......................... | ..........................$500,000 |
Apportion 40% to this state.......................... | ..........................$200,000 |
Add: Income from Contract L*.......................... | ..........................738,000 |
Total business income derived from sources within this state.......................... | ..........................$938,000 |
Add: Nonbusiness income allocated to this state.......................... | .........................., 8,000 |
Net income subject to tax.......................... | ..........................$946,000 |
* Income from Contract L apportioned to this state:
1990 | 1991 | 1992 | Total | |
Apportionment percentage for this state.......................... | 100% | 100% | 40% | |
Percent of project costs.......................... | 20% | 50% | 30% | 100% |
Product.......................... | 20% | 50% | 12% | 82% |
82% of $900,000 = $738,000. |
Example:
A contractor qualified to do business in this state had elected the completed contract method of accounting for long-term contracts. It was engaged in two long-term contracts; Contract L in this state was started in 1991 and completed at a profit of $900,000 on 12/16/93. The taxpayer withdrew on 12/31/93. Contract M in state X was started in 1992 and was incomplete on 12/31/93.
The apportionment percentages of the taxpayer as determined at subsection (d) of this regulation, and percentages of project costs as determined in subsection (e)(2) of this regulation, for each year for each contract are as follows:
1991 | 1992 | 1993 | Total | |
Apportionment percentage for the state.......................... | 30% | 20% | 40% | |
Percentage of project costs: | ||||
Contract L, this state.......................................................... | 20% | 50% | 30% | 100% |
Contract M, state X............................................................ | 0 | 10% | 25% | 35% |
The corporation had other business income (net of expenses) of $500,000 during 1992 and $300,000 during 1993. The gross contract price of Contract M (state X) was $1,000,000 and it was estimated to be 35% completed on 12/31/93. Total expenditures to date for Contract M (state X) were $300,000 for the period ended 12/31/93.
The measure of tax for the taxable year ended 12/31/93 (based upon measure of tax for taxable years 1992 and 1993) is computed as follows:
Taxable Year 1993 | ||
Taxable Year | Taxable Year | |
1992 | 1993 | |
Business income.................................................................................................... | ..........................$500,000 | $300,000 |
Apportionment percentage for this state.............................................................. | .......................... 20% | 40% |
Amount apportioned to this state.......................... | ..........................$100,000 | $120,000 |
Add: Income from contracts: | ||
* L (this state).......................................................................................................... | ............................................ | 252,000 |
** M (state X)........................................................................................................... | ............................................ | 6,000 |
Total Business Income derived from sources within this state.......................... | ..........................$100,000 | $378,000 |
* Income from Contract L apportioned to this state:
1991 | 1992 | 1993 | Total | |
Apportionment percentages.......................... | ..........................30% | 20% | 40% | |
Percentage of project costs.......................... | ..........................20% | 50% | 30% | 100% |
Product.......................... | ..........................6.0% | 10.0% | 12.0% | 28% |
28% of $900,000 = $252,000 |
** Income from Contract M apportioned to this state:
1991 | 1992 | 1993 | Total | |
Apportionment percentages.......................... | 0 | 20% | 40% | |
Percentage of project costs.......................... | 0 | 10% | 25% | 35% |
Product.......................... | 0 | 2.0% | 10.0% | 12.0% |
*** 12.0% of $50,000 = $6,000. |
*** Computation of apportionable income from Contract M based on percentage of completion method:
Total Contract Price......................................................................................................................... | $1,000,000 |
Estimated to be 35% completed.................................................................................................... | $350,000 |
Less: total expenditures to date..................................................................................................... | 300,000 |
Apportionable income..................................................................................................................... | $50,000 |
Cal. Code Regs. Tit. 18, §§ 25137-2
2. Amendment of section heading, section and NOTE filed 1-21-2003; operative 2-20-2003 (Register 2003, No. 4).
3. Change without regulatory effect amending subsections (d)(1), (d)(3) and (d)(7)-(e) filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).
Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 24673.2 and 25120- 25137, Revenue and Taxation Code.
2. Amendment of section heading, section and Note filed 1-21-2003; operative 2-20-2003 (Register 2003, No. 4).
3. Change without regulatory effect amending subsections (d)(1), (d)(3) and (d)(7)-(e) filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).