New Mexico Legislature eliminates double tax on leased equipment-—will Arizona follow?

Due to the construction downturn, many firms are leasing instead of purchasing new equipment. Here’s some BIG news from the Land of Enchantment for companies leasing equipment, passed along from CFMA member, David James CPA, CCIFP.

The New Mexico Legislature passed a provision to exempt rental/lease revenues from companies leasing construction equipment to “a person engaged in the construction business,” effective January 1st, 2013.

This legislation recognizes that states (New Mexico and Arizona most notably), which tax prime contractors on their gross receipts, are getting a double tax when contractors are charged tax on equipment rented to perform under a contract that is already taxed! It’s good for New Mexico to be progressive and eliminate this double tax …Arizona, however, still wants the revenue!

The process will require the contractor to issue a NTTC-6 form to the vendor. The vendor will then be able to exempt the rental income. This applies to direct rentals
as well as owner/operated equipment.

CFMA members in the Albuquerque chapter reported that various industry groups and CPA’s were able to meet with legislators to get this change. It may be time to explore this option in Arizona, although it was reported that New Mexico has a positive fiscal position, not necessarily enjoyed by Arizona.

If you are doing business in the “Land of Enchantment,” get out those NTTC-6 forms and save!

Here are the complete provisions of the New Mexico legislation:

**Effective January 1, 2013**

7-9-52.1. DEDUCTION–GROSS RECEIPTS TAX–LEASE OF CONSTRUCTION EQUIPMENT TO PERSONS ENGAGED IN THE CONSTRUCTION BUSINESS.–

A. Receipts from leasing construction equipment may be deducted from gross receipts if the construction equipment is leased to a person engaged in the construction business who delivers a nontaxable transaction certificate to the person leasing the construction equipment.

B. The lessee delivering the nontaxable transaction certificate shall only use the construction equipment at the construction location of:

(1) a construction project that is subject to the gross receipts tax upon its completion or upon the completion of the overall construction project of which it is a part;

(2) a construction project that is subject to the gross receipts tax upon the sale in the ordinary course of business of the real property upon which it was constructed; or

(3) a construction project that is located on the tribal territory of an Indian nation, tribe or pueblo.

C. As used in this section, “construction equipment” means equipment used on a construction project, including trash containers, portable toilets, scaffolding and temporary fencing.

(Laws 1998, Chapter 94, Section 1 – Effective January 1, 2013)

3.2.249.8 – LEASE OF CONSTRUCTION EQUIPMENT – GENERAL

A. Receipts from leasing construction equipment, with or without operators, on or after January 1, 2013, to a person engaged in the construction business may be deducted from the lessor’s gross receipts pursuant to Section 7-9-52.1 NMSA 1978.

B. Example 1: A is regularly engaged in the lease and rental of construction equipment. A enters into an agreement to lease a crane with an operator to a contractor engaged in the construction business to be used on a construction project. The contractor will direct all of the activity of the crane and operator on the construction site. A’s receipts from the lease of the crane with an operator are receipts from leasing construction equipment pursuant to Section 7-9-52.1 NMSA 1978 and are deductible.

C. Example 2: X is a heating and air conditioning subcontractor on a construction project. X owns a crane which X regularly uses to lift equipment onto the roof of buildings on which X works. X’s receipts for construction services includes payment for using the crane. X may deduct those receipts under Section 7-9-52 NMSA 1978. If, however, X agrees to lease the crane with an operator to the prime contractor for work unrelated to the subcontract, which work is performed at the direction of the prime contractor, X would not be able to deduct the receipts for the leasing of the crane under Section 7-9-52 NMSA 1978, but could deduct the receipts under Section 7-9-52.1 NMSA 1978 as receipts from the lease of construction equipment.

D. Example 3: C is engaged in the construction business. C hires S, a scaffolding rental company, to deliver scaffolding to a specific construction project, erect the scaffolding, inspect the equipment daily for continued safety compliance, disassemble the scaffolding and 3.2 NMAC transport it away from the construction site upon completion of the project. C may execute a nontaxable transaction certificate to S for the lease of the scaffolding pursuant to Section 7-9- 52.1 NMSA 1978.

E. This version of 3.2.249.8 NMAC applies to transactions occurring on or after January 1, 2013. [3.2.249.8 NMAC - N, 12/14/12]

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Q1 ‘Sage  Break’ 300 CRE Users Group Meeting on January 10, 2013

We had a great crowd at our Q1 Sage Break meeting! We all learned how to get an egg in a glass with a plate in between them for one thing. Hint: the right tool!

Want to join us for April’s breakfast meeting? Click here for details!

The session theme was on Year End issues, and CPA and Sage Certified Consultant,  Michelle Jardine, was there to moderate and advise the group. She started with whiteboarding issues and solutions. A couple of the issues raised appear below. But the question is – what would YOU suggest or share with the group?

Q: How do I access prior years’ (2 years back or more) financial statements and transactions after closing the current year? Or, in other words, I’m losing access to the previous prior year’s detail because I closed the year. How can I still access it after the close?

A: The solution, most users agreed, is properly archiving your data.

More suggestions made by the group:

1. Use Timberline Tools to copy prior year’s data to a new archive folder
2. Always roll back exactly 12 months when you are in the archive folder
3. Go to Company Settings>General
4. Use a naming convention that identifies the company folder by year and sorts it to the end like: ZZ(company name)Archive2009

Q: I’m closing late so I can’t generate financial statements because I’m waiting for adjusting journal entries (AJE).

A: The solution suggested is to close the year on time, enter the adjusting journal entries (AJE) as needed and reclose.

Lots of great whiteboarding tips!

And some users got down on their knees to explain archiving! Here’s Steve Mason in action.

The Sage 300 CRE Users Group meets quarterly in the Ledgerwood Associates Training Room.

Enhance your value to the company! Sign up for the next Sage 300 Users Group Meeting.

Still have questions about year end? Participate in the ongoing discussion! Join the LinkedIn Group: Sage 300 CRE Users Group – Ledgerwood Clients

Review this IRS checklist to shore up weak spots and improve your documentation in preparation for that unforeseen IRS audit. The list comes from the actual Audit Techniques Guide that the IRS uses to examine construction companies.

IRS Auditor’s Checklist of Items to Examine

• Accounting manual or instructions providing guidelines as to what accounts are debited   or credited, for contract transactions, and under what circumstances
• General ledgers and journals by entity
• Revenue journals or reports
• Schedule of contracts in process at year-end
• Detail of work in process by job number
• Detail of year-end prepaid expenses, accounts payable, and deferred income
• Contract manager’s file, or cost and income summaries, for select contracts
• Index of internal audit reports. Scan titles to identify those with audit potential

IRS Techniques When Auditing a Construction Company

Auditors will determine if

• A contract qualifies as long-term
• The taxpayer considered all contracts that commenced during the year. They may elect to defer contracts that are less than 10 percent complete
• The contract price is correct
• The costs to date and estimated costs to complete projects are correct
• There are contingency reserves included in the estimated costs to complete a contract
• The taxpayer has adjusted the percent of completion by any risk factors because of some potential risk involved in certain phases of construction. The terms of the contract should be reviewed to identify contract price revisions, such as change orders, options and additions.
• A contract is completed and accepted for purposes of the taxpayer’s normal method of accounting.

Adapted from the audit guide Construction Industry, under the IRS Market Segment Specialization Program

Submitted by Bryan Eto, beto@beachfleischman.com. Talk with your tax adviser, Beach Fleischman or Ledgerwood Associates for more information on this and other tax topics.