Contracting Examples

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MRRA

  • Materials vendors charge tax on the cost of the materials.
  • Request applicable exemptions (e.g., exempt machinery and equipment) using a Form 5000M exemption certificate.
  • Tax is treated by MRRA contractors as a cost of doing business.
  • MRRA contractor’s invoice to customers does not include a tax line item.
  • No TPT reporting required by the unlicensed MRRA contractor.

The left column explains the procedure, deduction, tax rate, etc., and the right column in grey provides a running example.

 

Purchasing the Materials EXAMPLE
  • All materials purchased tax exempt.
  • Licensed MRRA contractors provide materials vendors with Form 5000 Exemption Certificate.

$10,000.00 Total charges for materials purchased
Computing the TPT licensed MRRA Contractor’s TPT Return  
  • Materials purchased tax exempt are consumed on the job site.  Cost and retail equivalent must be reported in the tax period they are consumed.
 Materials incorporated into job site in Cave Creek, AZ
Login to www.AZTaxes.gov to complete the return

Compute: Add the total cost of materials and report under business code 315

$10,000.00 Total cost of materials

Less: Qualifying deductions

($4,000.00) Exempt M&E (deduction code 622)
  • Exempt machinery & equipment used in manufacturing (deduction code 622).
  
Equals: Tax base on Retail Equivalent Tax Due $6,000.00 Tax Base on Retail Equivalent Tax Due
Compute: Retail tax sourced to job site

6,000.00 × 0.063 = 378.00

6,000.00 × 0.030 = 180.00
Net Taxable Retail Income multiplied by state/county rate $378.00 Arizona/Maricopa rate = 6.3%
Net Taxable Retail Income multiplied by city rate $180.00 City of Cave Creek rate = 3.0%
Equals: Retail Equivalent Tax Due Reported by MRRA contractor under business code 315 $558.00 Retail Equivalent Tax Due

In this example a contractor is involved in both taxable modification and nontaxable MRRA activities and is reporting the gross income derived from all contracting activities for the tax period.  The contractor’s gross income on all jobs, include modification contract amount of $73,354 (this includes the taxes collected by the contractor) and MRRA contract amount of $30,000 (with $10,000 spent on the purchase of materials), for a total of gross receipts amount of $103,354.  The contractor purchased all materials tax exempt for both the modification and MRRA jobs.  When reporting, the contractor will report the gross income from all sources under business code 015 and will apply all relevant deductions.  After the relevant deductions have been applied the contractor will take the 35% reduction from gross leaving him with his taxable base. 

The contractor will then report the retail equivalent tax due under business code 315.  The reportable amount is the cost on the materials used in the MRRA jobs (not including shipping or handling costs).  Certain deductions may apply.  In this example the contractor’s MRRA activities included purchasing exempt machinery and equipment for the job.  So the contractor will take a deduction on the cost of the exempt machinery and equipment and calculate the retail TPT on the material costs using the TPT rate of the location of the job site (Cave Creek in this example).

The left column explains the procedure, deduction, tax rate, etc., and the right column in grey provides a running example.

 

Purchasing the Materials

EXAMPLE
  • All materials purchased tax exempt.
  • Licensed contractors provide materials vendors with Form 5000 Exemption Certificate.
 $10,000.00 Total charges for materials purchased

 

Computing a Contractor’s TPT Return with both MRRA and Modification to Report  
  • Materials are consumed on the job site.  Cost and retail equivalent must be reported in the tax period they are consumed.
  • Login online.

Materials incorporated into MRRA job site in Cave Creek, AZ and the modification activities occurring on a separate job in Phoenix, AZ.

Login to www.AZTaxes.gov to complete the return.
BUSINESS CODE 015: Report the gross income derived from ALL contracting activities  

Compute: Add the gross income derived from ALL contracting activities.

Add: Gross income and report under business code 015.

Modification = $70,000

MRRA = $30,000

Taxes Collected = $3,354

Total = $103,354

$103,354.00
Less: COMMON DEDUCTIONS-More can be found at link-A.R.S. 42-5075  
  • MRRA contracting - Deduction Code 500
  • Actual architectural costs - Deduction Code 557

  • Taxes collected/or factored - Deduction Code 551

    Please see the example in the modification section for computing the tax factored.

Please see the example in the modification section for computing the tax factored.

($30,000.00) MRRA (deduction code 500)

($10,000.00) Architect (deduction code 557)

($3,354.00) Tax collected (deduction code 551)
Equals: Calculation Base for 35% Reduction from gross $60,000.00 Calculation Base

Compute: Multiply the Calculation Base by 35%

Less: The 35% Reduction Amount - Deduction Code 502

$60,000 × 0.35 = $21,000

($21,000.00) 35% reduction from gross (Deduction Code 502)
Equals: Net Taxable Prime Contracting Income $39,000.00 Net Taxable Income

Compute: State/county tax and city tax

$39,000 × 0.063 = $2,457

$39,000 × 0.023 = $897
Net Taxable Prime Contracting Income multiplied by state/county rate $2,457.00 Arizona/Maricopa rate = 6.3%
Net Taxable Prime Contracting Income multiplied by city rate $ 897.00 City of Phoenix rate = 2.3%
Equals: Prime Contracting Tax Due under Business Code 15 $3,354.00 Prime Contracting Tax Due
BUSINESS CODE 315: Report the gross cost of materials purchased tax exempt and used on an MRRA job-job site is Cave Creek AZ  
Compute: Combine the total cost of materials and report under Business Code 315 $10,000.00 Total cost of materials
Less: Qualifying deductions ($4,000.00) Exempt M&E (deduction code 622)
  • Exempt machinery & equipment used in manufacturing (deduction code 622)
  
Equals: Tax base on Retail Equivalent Tax Due $6,000.00 Tax Base on Retail Equivalent Tax Due
Compute: Retail tax sourced to job site

$6,000.00 × 0.063 = $378.00

$6,000.00 × 0.030 = $180.00
Net Taxable Retail Income multiplied by state/county rate $252.00 Arizona/Maricopa rate = 6.3%
Net Taxable Retail Income multiplied by city rate $92.00 City of Cave Creek rate = 3.0%
Equals: Retail Equivalent Tax Due Reported by MRRA contractor under business code 315 $558.00 Retail Equivalent Tax Due

Modification

 

The computation begins with the gross income derived from modification contracting activities.

 

Gross Income from Modification Activities

EXAMPLE 

Calculating a Contractor’s Return

Add: The gross income derived from the modification activities reported under business code 015 (including taxes collected)

Less: COMMON DEDUCTIONS-More can be found at link-A.R.S. 42-5075

  • Development fees - Deduction Code 560
  • Actual architectural costs - Deduction Code 557

$300,000.00 New Office Building in Phoenix, AZ

($20,000.00) Development Fees (Deduction Code 560)

($30,000.00) Architect (Deduction Code 557)
Equals: Net Base for Computing the Factored Tax $250,000.00 Net Base

Compute: Amount of Factored Tax.

Apply the factoring formula to the net base (Click here to be taken to the Contractors Factor Worksheet)

 

 

 

 

 

Less: Factored Tax Amount

8.6% (combined state/county/city rate) = .086

.086 × 0.65 = 0.0559

0.0559 ÷ 1.0559 = 0.05294062
Many of the factoring calculations have been created on the Contractors Factor Worksheet

$250,000.00 × 0.05294062 = $13,235.16

($13,235.16) Factored Tax (Deduction Code 551)
Equals: Calculation Base for 35% Reduction from Gross Receipts $236,764.84 Calculation Base

Compute: Multiply the Calculation Base by 35%

 

Less: 35% Reduction from Gross Receipts - Deduction Code 502

$236,764.84 × 0.35 = $82,867.69

($82,867.69) 35% Reduction from Gross Receipts (Deduction Code 502)
Equals: Net Taxable Prime Contracting Income $153,897.15 Net Taxable Income
Compute: State/county tax and city tax

$153,897.15 × 0.063 = $9,695.52

$153,897.15 × 0.023 = $3,539.64
Net Taxable Prime Contracting Income multiplied by state/county rate $9,695.52 Arizona/Maricopa rate = 6.3%
Net Taxable Prime Contracting Income multiplied by city rate $3,539.64 City of Phoenix rate = 2.3%

Equals: Prime Contracting Tax Due

Hint: this should equal the factored tax amount above

 $13,235.16 Prime Contracting Tax Due

Speculative Builder

The computation begins with the gross income from the sale of the project. The reportable gross income from the sale of the property is the total selling price paid by the buyer.

 

Gross Income from Sale of the Property

EXAMPLE 

Preparing a Speculative Builder Return

Add: The gross income derived from the sale of the real property reported under business code 016.

Less: COMMON DEDUCTIONS-More can be found at MCTC § 416

  • State and County Tax Paid (paid to contractors for contracting constructing improvements or taxes paid on materials). - Deduction Code 802
  •  Architectural or engineering services - Deduction Code 557
  • Development Fees - Deduction Code 560

$500,000.00 Property Sale Price in Phoenix, AZ

($12,000.00) State and County Tax (Deduction Code 802)

($15,000.00) Architectural/Design Services (Deduction Code 557)

($5,000.00) Development Fees (Deduction Code 560)
Equals: Net Base for Computing the Factored Tax $468,000.00 Net Base

Compute: Amount of Factored Tax.

Apply the factoring formula to the net base (Click here to be taken to the Contractors Factor Worksheet) Note: Only city tax is factored.

 

 

 

Less: Factored Tax Deduction

2.30% (Phoenix tax rate) = .023

.023 × 0.65 = 0.01495

0.01495 ÷ 1.01495 = 0.01472978

$468,000 × 0.01472978 = $6,893.54

($6,893.54) Factored Tax (Deduction Code 551)
Equals: Calculation Base for Standard 35% Deduction $461,106.46 Calculation Base

Compute: Multiply the Calculation Base by 35% (the standard deduction)

 

Less: The 35% Deduction Allowed

$461,106.46 × 0.35 = $161,387.26

($161,387.26) 35% Deduction Allowed (Deduction Code 502)
Equals: Net Taxable Speculative Builder Income $299,719.20 Net Taxable Income
Compute: $299,719.20 × 0.023 = $6,893.54
Net Taxable Speculative Builder Income multiplied by the City Tax Rate $  6,893.54
Less: City Tax Credits (Total of City Tax Paid, either directly by the owner or to contractors retained to construct the improvements on the property, and upon materials incorporated into the improvement purchased by the owner upon which state, county and city tax was paid) $  4,600.00 City Tax Credits
Equals: City Speculative Builder Tax Due $   2,293.54 City Speculative Builder Tax Due