NM NR business worksheet

[Kea]

My client is a singer and had a concert job in New Mexico. Her travel & other expenses exceeded her income.

I'm trying to allocate her business property & income for the worksheet. For the personal property line, do I include the value of the hotel & car she rented? If so, I don't think I should extrapolate those out to the annual rent * 8, but just the rent she paid *8. She was only there a few days.

There is no payroll to allocate.

Gross receipts is pretty straightforward.

However, there seems to be no allocation for NM expenses. It seems strange that after losing money on the NM job, she should owe any NM tax. (OK, with my current estimates, it's only $2, but it just seems to me like it should be $0 since it is a loss.)

Any help on the personal property line and advise as to if there is a place to allocate expenses is greatly appreciated.

Thanks

[jainen]

>>it just seems to me like it should be $0 since it is a loss<<

Like most states, New Mexico does not calculate tax for non-residents solely on in-state income and expenses, but on the ratio of in-state items to world-wide items. Without running your actual numbers or reading the NM instructions, I would guess the ratio of expenses could be different from the ratio of gross income, so that New Mexico expenses might not entirely offset New Mexico income.

[Kea]

Unless I'm missing something from the NM instructions (which is what I'm hoping for), there is no place to account for expenses (NM / worldwide).

[Margaret CPA in OH]

I haven't looked at this form but many of my clients have business in multiple taxing municipalities. They all use the 3 or 4 items in a ratio to determine liability (if any). The elements are usually gross receipts, rents (of office or building, not a car or travel facilities, I think), assets at cost and wages in columns of all and this locality. The percentage of each element to the whole is added up for a total percentage (usually 0% for assets in the locality) and multiplied by the net income or loss for the whole. There is no allocation of expenses. So I think Jainen is saying the same thing. You can't determine on the individual locality whether or not there was a loss but multiply by the ratio.

[jainen]

>>there is no place to account for expenses<<

Although the instructions say to use gross "sales" (compensation) to determine the apportionment, it only calls for "total business and/or farm income reported on your federal Schedule C(s)" for that first line 9 entry. Well, "total income" isn't a term used in connection with Schedule C, so you must interpret it. In my opinion, a reasonable interpretation would be similar to how these instructions treat expenses from rental property, by which only the "net amount of rents" is reported in Column 1.

But note that you would be using total federal expenses, which as a ratio are apparently less than New Mexico. That is, overall she makes money even though this one trip was not profitable. So she doesn't get to completely offset her New Mexico income, and may have a small tax due.

[Kea]

Thanks for all the help. This is my first non-resident state return for someone self-employed. It just seemed strange that someone could owe a state income tax when there was no profit in that state. But it sounds like I am doing this correctly after all. At least it's only $2.

[jainen]

>>someone could owe a state income tax when there was no profit in that state<<

It is the same for employees. The idea is that the state income is a part of the whole. The state tax is based on a percentage of that whole amount. It works the other way too--even if she had no expenses at all in New Mexico, she would still get to use the federal expenses to reduce her state tax. And remember, she gets a credit against her home state taxes, so there really is little disadvantage.

[Kea]

But is this the right way to handle the business property portion?

I'm trying to allocate her business property & income for the worksheet. For the personal property line, do I include the value of the hotel & car she rented? If so, I don't think I should extrapolate those out to the annual rent * 8, but just the rent she paid *8. She was only there a few days.

Sorry for the long delay on re-asking. I'm currently traveling and this hasn't been a high priority. But my client is ready for me to wrap it up.

Thanks.

[jainen]

>>I don't think I should extrapolate those out to the annual rent * 8<<

Why not? That's what the instructions say you are supposed to do, for New Mexico and worldwide rented property. The idea is to use a standard measure to get that ratio for NM tax. If you want to invent new definitions your first time, you're on your own.

[Kea]

Agreed -- that's why I'm uncomfortable with this. But it also doesn't make sense to extrapolate out a car she only used a few days the same way as apartment that she lives in full time. I don't have a (big) problem with the "* 8" part, but extrapolating out a few days rent to what it would cost to rent for a year seems to really over-weight it compared to what she really owns or rents in NM.

[jainen]

>>extrapolating out a few days rent to what it would cost to rent for a year seems to really over-weight it <<

Oh, sorry, I see what you mean now. Well, I don't think anybody is asking for "what it WOULD cost." Aren't they just asking what it DID cost?

[Kea]

Basically they are going for percent assets used in NM compared to the total. In the case of rentals (like the OIH in her apartment), they say to use the annual rent * 8. So for the apartment I used the rent (pro-rated to the OIH just like on the OIH form) & multiplied by 8. I used the original price of the assets she is depreciating (per instructions). So, for the total assets, I think I'm OK. But she didn't take any of her assets to NM. She did rent a car and stay in a motel. Since she was only in NM for a few days, this should be a very small percentage of her total assets.

I'm thinking it doesn't make sense to use yearly rental cost for the car and motel -- that would be enormous! I would "assume" it should only be the rent she paid during the year. Since this was the full extent of the assets in NM, it seems like the rent paid should be the total. Multiplying by 8 still seems like a stretch since she won't be using these assets again, but NM seems to use this as some kind of rent to ownership conversion. (OK, I can understand this better for the ongoing apartment than for the temporary hotel and rental car. But if that's what they want for a conversion, maybe.) I just can't make the extrapolation out to a year for the apartment and rental car make sense. That just gives way too much weight to the NM "assets."

I hope that clarified my confusion.

[Margaret CPA in OH]

In my opinion as above on May 10, the car rental and apartment rental (motel with cooking facilities?, extended stay?)are really travel expenses and should not be part of this allocation. I think that she will and should end up paying a tiny amount of NM tax in proportion to the gross receipts. That tax will then be a 2010 deduction against income as local or state tax or a credit against 2009 home state tax.

In my many years of multiple municipal returns for contractors, it sometimes works out this way. If there is a loss, that is allocated in proportion even though one muni may, for book purposes, have activity that resulted in a profit. And is there is an overall gain, each shares in proportion even if one had, for book purposes, a loss.

[Kea]

I agree that the motel & rental car are travel expenses - that's where they are on the federal return. But the NM instructions state:

"Property the taxpayer rented from others and used for business or farm purposes shall be valued at eight time the net annual rental rate. The net annual rental rate is the annual rent paid by the taxpayer, less any annual rent received by the taxpayer from subrentals of the same property."

I think that last sentence means I can just use the rent paid * 8, and not try to extrapolate to the whole year.

So, from a NM perspective, there is no OIH in the motel and the rental car is just transportation. No work is conducted in the car. They are business expenses on the Sch C, but maybe they shouldn't be included the property allocation on NM? I'm just not sure how NM would interpret this.

And, yes, I know I can deduct the tax paid in 2010 on next year's return.

[Margaret CPA in OH]

I would still take the position that this does not mean car rental or motel room rental. Perhaps you could call NM department for clarification. I can't imagine that it means everything rented for any business purpose. Many business people rent a projector for a presentation for a couple of hours. I would not even think of including that.

Perhaps a key word might be "annual" rental rate which would be reasonable when renting an office for business purposes or a copier, for example. Your quote also uses the term, "subrental." How likely is it that they mean a rented car used for several days or a room for a temporary stay? I believe the intention is for property used for business purposes that would be ordinarily rented or be expected to be rented on an annual basis. If this client has no business office rented anywhere, put a zero in both places. Neither of my contractors rents anything that would be on an annual basis. It never occurred to me to include the occasional rental of a machine to be included there.

So maybe check with the NM tax department because I don't think any of us here really know the answer. Then maybe tell us what the answer is - for next time. Good luck!