Section 1320-06-01-.38 - CONSTRUCTING OR IMPROVING REAL PROPERTY - SPECIAL APPORTIONMENT RULESEarnings from construction contracts must be apportioned to Tennessee pursuant to the property, payroll, and sales apportionment factors set forth in T.C.A. § 67-4-2012. Property, payroll, and sales apportionment factors for the apportionment of income from construction contracts shall be determined as follows:
(1) Property Factor. In general, the numerator and denominator of the property factor shall be determined as set forth in T.C.A. § 67-4-2012(b), (c) and (d), and Rules 1320-06-01-.27 through .29, inclusive. However, the following special rules are also applicable.(a) Rents In paid for the use of equipment are included in the property factor at eight times the net annual rental rate even though such rental expense may be capitalized into the costs of construction.(b) "Rents paid" shall include rent expense in the income year for which it is deductible under the taxpayer's method of accounting for federal income tax purposes.(c) Rent expense which is capitalized to a particular construction project shall be attributed to the state in which the construction project is located.(2) Payroll Factor. In general, the numerator and denominator of the payroll factor shall be determined as set forth in T.C.A. § 67-4-2012 (e) and (f) and Rules 1320-06-01-.30 and .31. However the following special rules are also applicable. (a) Compensation paid to employees which is attributable to a particular construction project is included in the payroll factor even though capitalized into the costs of construction.(b) The payroll factor is computed by including compensation in the income year for which it is deductible under the taxpayer's method of accounting for federal income tax purposes.(c) Compensation paid to employees which is capitalized to a particular construction project shall be attributed to the state in which the construction project is located.(3) Sales Factor. In general, the numerator and denominator of the sales factor shall be determined as set forth in T.C.A. § 67-4-2012(g), (h) and (i), Rules 1320-06-01-.32 through .34, inclusive, and Rule 1320-06-01-.42. However, the following special rules are also applicable: (a) The sales factor is computed by including gross receipts in the income year for which it is includable under the taxpayer's method of accounting for federal income tax purposes.(b) Gross receipts derived from the performance of a contract are attributable to Tennessee if the construction project is located in Tennessee. If the construction project is located partly within and partly without Tennessee, the gross receipts, payroll and property factors attributable to Tennessee are based upon the ratio which construction costs for the project in Tennessee bear to the total of construction costs for the entire project or any other method, such as engineering cost estimates, which will provide a reasonable apportionment.Tenn. Comp. R. & Regs. 1320-06-01-.38
Original rule filed March 9, 1990; effective April 23, 1990. Amendments filed June 28, 2016; effective 9/26/2016.Authority: T.C.A. §§ 67-1-102, 67-1-811, and 67-4-2012.