CF 1994-02 -Newly-enacted Investment Tax Credit Law -
October 14, 1994
Note: Amending legislation is
currently being discussed. However, at this time no such
legislation has been introduced.
Amended Substitute Senate Bill 269 enacts Ohio Revised Code
(ORC) sections 5733.31 and 5747.26 to create a nonrefundable
franchise tax credit and a nonrefundable individual income
tax credit for manufacturers that during the eighteen-month
period January 1, 1995 through June 30, 1996 purchase new
manufacturing machinery and equipment that the taxpayer will
both locate in Ohio and use as a manufacturer. The franchise
tax credit applies only if the aggregate cumulative cost of
the new manufacturing machinery and equipment purchased for
locations in Ohio during the eighteen-month period by the
taxpayer or component members of the taxpayer's federal
controlled group equals or exceeds a threshold of 20% of the
aggregate cost of all tangible personal property located in
the United States and owned by the taxpayer or component
members of the taxpayer's federal controlled group at the
close of the taxpayer's most recent taxable year ending
before the eighteen-month period. The credit equals 20% of
the cost of such new manufacturing machinery and equipment
purchased by the taxpayer during the eighteen-month period.
The maximum credit allowed to a taxpayer or to a controlled
group of corporations of which the taxpayer is a component
member is $500,000. The credit first applies to tax year
(report year) 1996 for taxable years that end in 1995.
If a taxpayer is a direct or indirect partner in a
partnership, the taxpayer is allowed its distributive share
of the credit available through the partnership's purchases
of new manufacturing machinery and equipment during the
eighteen-month period provided that all of
the conditions set forth below are satisfied:
1. The partnership's purchases of new manufacturing
equipment will be located in Ohio and will be used by the
partnership in manufacturing.
2. The partnership's cumulative cost of the new
manufacturing machinery and equipment purchased for
locations in Ohio during the eighteen-month period equals
or exceeds 20% of the aggregate cost of all the
partnership's tangible personal property located in the
United States at the close of the partnership's most recent
federal taxable year ending before the eighteen-month
period.
3. The taxpayer's distributive share of the partnership's
cumulative cost of such new manufacturing machinery and
equipment, when added to the cumulative cost of any other
such new manufacturing machinery and equipment purchased
for locations in Ohio by the taxpayer or by other component
members of the taxpayer's federal controlled group equals
or exceeds 20% of the aggregate cost of all tangible
personal property located in the United States and owned by
the taxpayer or by other component members of the
taxpayer's controlled group at the close of the taxpayer's
most recent taxable year ending before the eighteen-month
period.
Analysis and Interpretation
- The credit is not limited to qualifying
purchases that exceed the 20% threshold. That is, if the 20%
threshold test is satisfied, the credit applies to
all purchases of qualifying
equipment1 during the eighteen-month period.
- The Department interprets the term "tangible personal
property" as including every tangible thing except real
property. Real property is defined as land, growing crops,
all buildings, structures, improvements and fixtures on the
land. Inventory is tangible personal property.
- The term "new manufacturing machinery or equipment" means
manufacturing machinery or equipment, the original use of
which commences with the taxpayer or with a partnership of
which the taxpayer is a partner. A taxpayer or partnership
that purchases a reconditioned or rebuilt machine is not the
original user of that machine and as such, the machine is not
"new" and does not qualify for the credit. However,
manufacturing machinery and equipment will generally be
considered "new" if it does not contain more than 20% used
materials and parts. In determining whether manufacturing
machinery and equipment is "new", the Department will rely on
the federal regulations, revenue rulings and case law
pertaining to the federal investment tax credit provided in
IRC section 46.
- The term "purchase" has the same meaning as in IRC
section 179(d)(2). If a lease is treated as a purchase under
IRC section 179(d)(2), it is also treated as a purchase for
purposes of the credit.
In the Department's view there is a qualifying "purchase"
during the eighteen-month period beginning January 1, 1995
and ending June 30, 1996 under either of the
following conditions:
- During the period beginning July 22, 1994 (the
effective date of the new law) and ending December 31, 1994
the taxpayer places a purchase order or otherwise enters
into a legally binding obligation or contract to purchase
such property and the taxpayer
places it in service in manufacturing in Ohio during the
period beginning January 1, 1995 and ending June 30,
1996.
- During the period beginning January 1, 1995 and ending
June 30, 1996 the taxpayer places a purchase order or
otherwise enters into a legally binding obligation or
contract to purchase such property regardless of when the
taxpayer actually places it in service in manufacturing in
Ohio.
The Department maintains that if prior to July 22, 1994 the
taxpayer placed the purchase order or entered into a legally
binding obligation or contract to purchase such property, the
taxpayer will not be entitled to the
credit even if the taxpayer takes delivery of such
manufacturing equipment during the period beginning January
1, 1995 and ending June 30, 1996.
- The term "cost" has the same meaning as in IRC section
179(d)(3). For example, if qualifying property is
purchased for $4,000 cash plus the trade-in of an old machine
that has an adjusted basis of $5,000 the credit applies only
to $4,000.
- The terms "manufacturer" and "manufacturing machinery and
equipment" have the same meaning as in ORC section
5711.16. As such, property tax law (both statutory law
and case law) applies for purposes of determining whether a
taxpayer is a manufacturer and whether property is used in
manufacturing. In addition, since the ORC section 5711.16
personal property tax definitions of "manufacturer" and
"manufacturing machinery and equipment" also apply to the
credits under ORC section 5733.061 and 5747.051 for property
used in manufacturing, case law pertaining to those credits
also applies to the new credit. Thus, pursuant to
Stoneco Inc. v.
Limbach (1990), 53 Ohio St. 3d 170 the "integrated
plant test"2 applies to the new credit for
purposes of determining whether or not property is used in
manufacturing.
- A taxpayer may not claim the credit on its purchases of
otherwise qualifying equipment if the taxpayer leases the
property to another. The taxpayer that claims the credit must
purchase the property and must use the property "as a
manufacturer". (In contrast, the ORC section 5733.061 credit
for manufacturing property did not require that the purchaser
use the qualifying property in manufacturing; it merely
required that the property be used in manufacturing. Thus, if
an owner-lessor leased qualifying property to a
manufacturer-lessee, the owner-lessor was entitled to the ORC
section 5733.061 credit--not so for the new credit.)
- In determining whether the 20% threshold test is met, the
cost of new manufacturing machinery and equipment purchased
for locations outside Ohio is not
considered. The 20% threshold test compares the cost of new
manufacturing machinery and equipment purchased during the
eighteen-month period for locations in Ohio to 20% of the
cost (not the depreciated book value) of all tangible
personal property (not merely manufacturing machinery and
equipment) located in the United States (not merely Ohio) as
of the close of the taxpayer's most recent taxable year that
ended before the eighteen-month period. As noted above,
"tangible personal property" includes inventory.
- The new law requires that members of a controlled group
of corporations compute the 20% threshold test on a
consolidated basis. This precludes a corporation not
otherwise qualifying for the credit from forming a new
subsidiary whose purchases on a stand-alone basis would
qualify for the credit.
The 20% threshold test is determined ". . . at the close of
the taxpayer's most recent taxable year ending before the
eighteen-month period." Although a new corporation
organized during the eighteen-month period technically will
not have a taxable year3 that ends before the
eighteen-month period, a new corporation will be treated as
having no property on the threshold date. Accordingly, new
manufacturing corporations organized during the
eighteen-month period and first acquiring property during
the eighteen-month period are always entitled to the credit
on their purchases of qualifying property during the
eighteen-month period since new corporations have no
threshold below which their purchases do not qualify (20%
of zero is zero) and any purchase of qualifying property
will exceed the threshold (assuming that the new
corporation is not a component member of a federal
controlled group that on a consolidated basis does not meet
the 20% threshold test).
Also, a corporation that has been doing business outside
Ohio prior to the eighteen-month period and that first
becomes an Ohio taxpayer during the eighteen-month period
is entitled to the credit on its purchases of qualifying
equipment during the eighteen-month period if those
purchases satisfy the 20% threshold test at the close of
the taxpayer's most recent federal taxable year
ending before the eighteen-month period.
- The term "component member" has the same meaning as in
IRC section 1563(b). The determination of what corporations
are component members of the same controlled group is made at
the end of
each of the two or three taxable years that include any
portion of the eighteen-month period. That is, for
each taxable
year the taxpayer must carry out the following steps:
- Determine all the component members of the controlled
group that includes the taxpayer.
- Add up the cost of qualifying assets purchased by each
component member (see Step #11, above) purchased during the
period beginning on January 1, 1995 and ending on the earlier
of ...
- The last day of the taxable year or
- June 30, 1996
- Add up the cost of tangible personal property owned by
each component member (see Step #1) as of the last day of the
taxpayer's taxable year ending prior to January 1, 1995.
- Multiply the amount in Step #3 by 20%.
- Is the amount in Step #2 equal to or greater than the
amount in Step #4?
If "yes", then each taxpayer is eligible for the credit on
its purchases of qualifying equipment.
If "no", then each taxpayer is not eligible for the credit.
- The Department maintains that for purposes of determining
whether the 20% threshold test is met under ORC section
5733.31(B)(2) the "... aggregate cost of all tangible
personal property located in the United States and owned by
the taxpayer or by other component members of the taxpayer's
controlled group at the close of the taxpayer's most recent
taxable year ending before the eighteen-month period" must
include the taxpayer's and its component members'
proportionate share of the cost of tangible personal property
owned by any partnership in which the taxpayer or its
component members held an interest.
- The term "controlled group" has the same meaning as in
IRC section 179(d)(7). Generally, a controlled group of
corporations is a group of two or more corporations connected
through stock ownership of at least 50% of the total combined
voting power of all classes of stock.
- The taxpayer may allocate the amount of the credit among
any of its taxable years that end after the purchase is made
and that include any portion of the eighteen-month period.
The Department interprets this provision as follows:
- If by the date the taxpayer files its franchise
tax report for a taxable year that includes a portion of
the eighteen-month period the taxpayer's cumulative
purchases of qualifying equipment during the eighteen-month
period equal or exceed the required threshold, the taxpayer
may claim on that report a credit for its purchases of
qualifying equipment during the portion of the
eighteen-month period included in the taxable year
reflected on that report. The taxpayer may claim the credit
in spite of the fact that its purchases of qualifying
equipment during the portion of the eighteen-month period
included in the taxable year did not equal or exceed the
required threshold.
- The taxpayer may not allocate the credit for a
qualifying purchase to a taxable year that ended
before the
purchase was made.
- If by the date the taxpayer files its franchise tax
report for a taxable year that includes a portion of the
eighteen-month period the taxpayer's cumulative purchases
of qualifying equipment do not equal or exceed the required
threshold, the taxpayer may not claim on its original
franchise tax report a credit for its purchases. However,
if after the date the taxpayer files its report the
cumulative purchases of qualifying equipment during the
eighteen-month period equal or exceed the required
threshold, the taxpayer may either: (i) file an amended
report for the taxable year of the purchase or (ii) claim
the credit for the purchase on the report for a subsequent
taxable year.
The following examples and their illustrations explain the
Department's interpretation of this portion of the new law:
Example I - See Illustration
Assume the following facts:
- A Inc. is a small manufacturer that has operated entirely
in Ohio for several years. A Inc., is not a component member
of a controlled group of corporations nor is it a partner in
a partnetship.
- The taxpayer has a 3/31 fiscal year end. The close of the
taxpayer's most recent taxable year that ended before the
eighteen-month period is 3/31/94 and as of that date the
total cost of the taxpayer's tangible personal property
located in the United States is $2,500,000.
- The taxpayer's taxable years that include portions of the
eighteen-month period and the dates that the taxpayer filed
the franchise tax reports for those taxable years are as
follows:
|
Taxable Year
|
Tax Year
(Report Year)
|
Date
Report Filed
|
|
4/1/94 - 3/31/95
4/1/95 - 3/31/96
4/1/96 - 3/31/97
|
1996
1997
1998
|
5/31/96
5/31/97
5/31/98
|
- 20% of the taxpayer's cost of all tangible personal
property located in the United States at 3/31/94, which is
the close of the taxpayer's most recent taxable year that
ended before the eighteen-month period, is $500,000 (20% X
$2,500,000). Thus, in order for the credit to apply to the
taxpayer's purchases of qualifying equipment, the cumulative
cost of those qualifying purchases during the eighteen-month
period must equal or exceed the $500,000 threshold.
- During the period 1/1/95 to 3/31/95, which is the portion
of the eighteen-month period included within the taxpayer's
taxable year that ended 3/31/95, the taxpayer purchased
$100,000 of qualifying equipment.
- During the taxable year 4/1/95 to 3/31/96, which is
entirely within the eighteen-month period, the taxpayer
purchased an additional $420,000 of qualifying equipment. The
cumulative cost of the taxpayer's purchases through 3/31/96
of the eighteen-month period is $520,000 ($100,000 +
$420,000).
- During the period 4/1/96 to 6/30/96, which is the portion
of the eighteen-month period included within the taxpayer's
taxable year that ended 3/31/97, the taxpayer purchased an
additional $60,000 of qualifying equipment. The cumulative
cost of the taxpayer's purchases during the eighteen-month
period is $580,000 (100,000 + 420,000 + 60,000).
- For each of the taxable years that includes a portion of
the eighteen-month period the taxpayer's total tax due before
payments exceeds the taxpayer's total nonrefundable credits.
Since the $580,000 cumulative cost of the taxpayer's
qualifying purchases during the eighteen-month period
equals or exceeds the $500,000 threshold, the credit
applies to all of the taxpayer's qualifying purchases
during the eighteen-month period.
On its 1996 franchise tax report for the taxable year
4/1/94 to 3/31/95 the taxpayer may claim a credit of
$20,000 (20% of the $100,000 cost of its qualifying
purchases. Although, the $100,000 cumulative cost of the
taxpayer's qualifying purchases during the period 1 /1 /95
to 3/31/95 did not equal or exceed the required $500,000
threshold, the taxpayer may nevertheless claim the credit
for the $100,000 of qualifying purchases on its 1996 report
because by 5/31/96, the date that it filed its 1996
franchise tax report, the taxpayer had made additional
qualifying purchases sufficient to satisfy the $500,000
threshold requirement. However, on its 1996 franchise tax
report for the taxable year 4/1/94 to 3/31/95 the taxpayer
may not claim a credit for the $420,000 of qualifying
purchases made during its taxable year 4/1/95 to 3/31/96
because a taxpayer may not allocate the credit to a taxable
year before the purchase.
On its 1997 franchise tax report for the taxable year
4/1/95 to 3/31/96 the taxpayer may claim a credit of
$84,000 (20% of the $420,000 cost of its qualifying
purchases during the period 4/11/95 to 3/31/96).
On its 1998 franchise tax report for the taxable year
4/1/96 to 3/31/97 the taxpayer may claim a credit of
$12,000 (20% of the $60,000 cost of its qualifying
purchases during the period 4/11/96 to 6/30/96).
Example 2 - See Illustration
Assume the same facts as in Example I except that the
taxpayer's qualifying purchases during the eighteen-month
period are as follows:
|
Period
|
Cost of Qualifying Purchases
|
Cumulative Cost of Qualifying
Purchases
|
|
1/1/95 - 3/31/95
4/1/95 - 3/31/96
4/1/96 - 5/31/96
6/1/96 - 6/30/96
|
$100,000
350,000
40,000
90,000
|
$100,000
450,000
490,000
580,000
|
On its 1996 franchise tax report for the taxable year
4/11/94 - 3/31/95 the taxpayer may not
claim a credit for its $100,000 of qualifying purchases
during the period 1/1 /95 to 3/31/95 because by 5/31/96,
the date that the taxpayer filed its 1996 franchise tax
report, the $490,000 cumulative cost of the taxpayer's
qualifying purchases did not equal or exceed the $500,000
threshold.
Once the $500,000 threshold has been satisfied (sometime
during the period 6/1/96 - 6/30/96), the taxpayer may claim
the $20,000 credit for its $100,000 of qualifying purchases
during the period 1/1/95 - 3/31/95 by either: (i)
filing an amended 1996 franchise tax report, or (ii)
including the credit on its 1997 report.
On its 1997 franchise tax report filed 5/31/97 the taxpayer
may claim the $70,000 credit for its $350,000 of qualifying
purchases during its 4/1/95 -3/31/96 taxable year. As noted
above, if the taxpayer elects not to file an amended 1996
franchise tax report for its purchases of qualifying
equipment during the period 1/1/95 - 3/31/95, the taxpayer
may claim the credit for those purchases on its 1997
report.
On its 1998 franchise tax report filed 5/31/98 the taxpayer
may claim the $26,000 credit for its $130,000 of qualifying
purchases during the period 4/1/96 to 6/30/96, the portion
of the eighteen-month period included in the taxpayer's
4/1/96 to 3/31/97 taxable year.
- The aggregate credit allowed to a taxpayer, or if the
taxpayer is a component member of a controlled group of
corporations, to the controlled group, may not exceed
$500,000. (The $500,000 credit limitation is a total
limitation for all years combined; it is not a per-year
limitation.)
Once a taxpayer and its component members satisfy the 20%
threshold requirement on a consolidated basis, each
taxpayer then separately determines and claims its own
credit for its purchases. If the sum of the separately
determined credits for the component members exceeds the
controlled group's $500,000 credit limitation, the group
must allocate the $500,000 credit among the component
members whose purchases generated the credit. The group may
allocate the credit among the taxpayers in any manner it
elects, but the group may not allocate more credit to a
taxpayer than was generated by the taxpayer's purchases.
The election, however made, may be changed any time within
the three-year statute of limitations.
The following example illustrates the Department's
interpretation of this portion of the new law.
Example 3
Taxpayer corporations A, B and C are component members of a
controlled group of corporations that has no additional
component members. Each corporation has a December 31 year
end and during the eighteen-month period each corporation
purchased new machinery and equipment that the corporations
locate in Ohio and use in manufacturing. The purchases of
qualifying equipment during the eighteen-month period and the
tangible personal property located in the United States as of
December 31, 1994 (the close of the taxpayers' most recent
taxable year that ended before the eighteen-month period) are
as follows:
|
Corporation
|
Cost of Qualifying Purchases during the
Eighteen-month period
|
Cost of Tangible Personal Property Located in
the U.S. as of 12/31/94
|
|
A
B
C
TOTAL
|
$100,000
50,000
2,600,000
$2,750,000
$2,750,000
|
>
|
$700,000
1,000,000
12,000,000
$13,700,000
x
.20
$2,740,000
|
The controlled group's aggregate cost of qualifying
purchases during the eighteen-month period equals or
exceeds 20% of the controlled group's aggregate cost of all
tangible personal property located in the United States as
of December 31, 1994 (the close of the taxpayers' most
recent taxable year that ended before the eighteen-month
period). Accordingly, each member of the group may claim a
credit for its purchases of qualifying property.
The separately determined credit for each member of the
group determined without regard to the limitation is shown
in the table below.
|
Corporation
|
Cost of Qualifying
Purchases
|
X
|
Credit %
|
=
|
Credit Prior to Allocation
|
|
A
B
C
|
$100,000
50,000
2,600,000
|
x
x
x
|
20%
20%
20%
|
=
=
=
TOTAL
|
$20,000
10,000
520,000
$550,000
|
Since the sum of the separately determined credits for the
component members of the controlled group exceeds the
controlled group's $500,000 credit limitation, the group must
allocate the $500,000 credit among the component members
whose purchases generated the credit. The controlled group
may allocate its $500,000 credit in any manner it elects, but
the group may not allocate more than $20,000 to A and $10,000
to B because the group may not allocate more credit to a
taxpayer than was generated by the taxpayer's purchases.
- The new law does not contain a recapture provision for
property that is sold or transferred outside Ohio after the
credit is claimed.
- A franchise taxpayer must claim its nonrefundable credits
(and when applicable, its unused credit carryforward amounts)
in the order set forth in ORC section 5733.98. The order is
important because certain credits have no carryforward or a
limited carryforward period after which the unused amount
expires.
The amount of the ORC section 5733.31 nonrefundable credit
not used in the taxable years that include the
eighteen-month period may be carried forward for three
taxable years following the last taxable year that includes
any portion of the eighteen-month period. Of course, the
amount of credit used in any taxable year is deducted from
the balance carried forward. Amounts not used within the
three-year carryforward period expire.
The following example explains the Department's
interpretation of this portion of the new law.
Example 4
Assume the same facts as in Example I except for the
following:
- The taxpayer's tax due before considering any credits and
payments is $50,000 for tax year 1997 (taxable year 4/1/95 -
3/31/96) and $20,000 for tax year 1998 (taxable year 4/1/96 -
3/31/97).
- The taxpayer is not entitled to any of the credits that
precede the ORC section 5733.31 credit in the order
established by ORC section 5733.98.
On its 1997 report the taxpayer may use only $50,000 of the
$84,000 credit generated from its qualifying purchases during
the taxable year because a nonrefundable credit may not
reduce the tax liability (before considering any payments)
below zero. The $34,000 of unused 1997 credit is carried
forward to the 1998 report.
The total available credit for 1998 is $46,000 (the $34,000
carried forward from 1997 plus $12,000 generated from the
taxpayer's $60,000 of qualifying purchases during the period
4/1/96 to 6/30/96 (which falls within the taxable year 4/1/96
- 3/31/97). On its 1998 report the taxpayer may use only
$20,000 of its $46,000 available credit because a
nonrefundable credit may not reduce the tax liability (before
considering any payments) below zero. So, following the 1998
report the unused credit carryforward is $26,000.
Since the taxable year 4/1/96 to 3/31/97 is the last taxable
year that includes any portion of the eighteen-month period,
the taxpayer may carry forward its $26,000 of unused credit
to its three taxable years ending 3/31/98, 3/31/99 and
3/31/2000. The amount of credit carryforward used in any
taxable year is deducted from the balance carried forward to
the next year. Any remaining credit that is not used on the
report for the taxable year ending 3/31/2000 expires.
* * * * *
Tax Information Releases are not "Opinions of the Tax
Commissioner" within the meaning of ORC section 5703.53.
However, the above discussion does reflect the Income Tax
Audit Division's interpretation of the law.
For more information about this new law, call the numbers
listed below:
1-614-433-7617
Ohio Relay Service for the hearing-impaired: 1-800-750-0750
1For purposes of this summary and analysis the
term "qualifying equipment" means new manufacturing machinery
or equipment that the taxpayer locates in Ohio and uses in
manufacturing. The term "qualifying purchase" means a
purchase of qualifying equipment.2Machinery and
equipment is part of an integrated plant if it is essential
to production and is integrated into a synchronized system of
manufacturing whether or not it actually causes a physical
change in raw materials.
3The term "taxable year" is defined in ORC section
5733.04(E) as ". - - the year or portion thereof upon the net
income of which the value of the taxpayer's issued and
outstanding shares of stock is determined or the year at the
end of which the total value of the corporation is
determined." A corporation that is not subject to the
franchise tax does not have a taxable year. In Litton Industrial Products,
Inc. v. Limbach 1991), 58 Ohio St. 3d 169 the Ohio
Supreme Court applied a strict literal interpretation of the
term "taxable year" when it held that a surviving corporation
to a merger was not entitled to the net operating losses
incurred by the nonsurvivor during the nonsurvivor's fiscal
year ending in the merger year because the loss was not
incurred in a taxable year.