Information Release

CF 1995-01  - Second Credit for Purchases of New Manufacturing Machinery and Equipment - September 22, 1995

Important note: The Tax Department has rescinded a portion of the sentence appearing immediately above "Cost."

Amended Substitute Senate Bill 188, 121st General Assembly (effective July 19, 1995) enacts Ohio Revised Code (ORC) sections 5733.33 and 5747.31 to create a nonrefundable franchise tax credit and a nonrefundable individual/estate income tax credit for taxpayer-manufacturers that during the forty-two month period July 1, 1995 to December 31, 1998 purchase new manufacturing machinery and equipment1 provided that the taxpayer installs the machinery and equipment in Ohio no later than December 31, 1999. The credit also applies to taxpayers that have an interest in flow-through entities (sole.proprietorships, S corporations, limited liability companies (LLC) and partnerships) that during the forty-two month period purchase new manufacturing machinery and equipment provided that the flow-through entity installs the machinery and equipment in Ohio no later than December 31, 1999. We refer to new manufacturing machinery and equipment that is purchased by a manufacturer during the period July 1, 1995 to December 31, 1998 and installed in Ohio no later than December 31, 1999 as "qualifying equipment".

A taxpayer must separately determine the credit for the qualifying equipment that the taxpayer (or a flow-through entity in which the taxpayer has an interest) purchases for use in each Ohio county and each eligible area during each of four separate qualifying periods that comprise the forty-two month period July 1, 1995 to December 31, 1998. The four separate qualifying periods are the six month period July 1, 1995 to December 31, 1995 and the calendar years 1996, 1997 and 1998. The credit for each county and each eligible area for each qualifying period stands alone: purchases during one period for use in a county or eligible area may not be combined with purchases in another period or for another county or eligible area in order to qualify for the credit.

The credit equals 7.5% of the amount by which the cost of qualifying equipment purchased during a qualifying period for use in the Ohio county exceeds the base investment for that county, and for those Ohio counties and municipalities designated as eligible areas the credit equals 13.5% of the amount by which the cost of qualifying equipment purchased during a qualifying period for use in the eligible area exceeds the base investment for the county. (The law refers to the term "base investment" as the "county average new manufacturing machinery and equipment investment.") The credit computation is the same for each of the four qualifying periods: the base investment for the county is subtracted from the cost of qualifying equipment purchased during the qualifying period for use in that county or eligible area and the difference is multiplied by the 7.5% or 13.5% credit rate. The credit for each qualifying period is based on the cost of qualifying equipment purchased during the period (even if the taxpayer's taxable year or flow-through entity's taxable year is not a calendar year). A taxpayer that is entitled to the credit in more than one county or eligible area may aggregate the amount of the credits.

Definitions and Interpretations
ORC section 5733.33(A)

Manufacturing machinery and equipment. The new law defines "manufacturing machinery and equipment" as engines and machinery, and tools and implements, of every kind used, or designed to be used, in refining and manufacturing. Because this definition is very similar to the definition found in Ohio personal property tax law (see ORC section 5711.16), the Department of Taxation will follow property tax law (both statutory law and case law) 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 ORC section 5733.061 franchise tax credit and the ORC section 5747.051 individual income tax credit 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" applies to the new credit for purposes of determining whether or not property is used in manufacturing. (Machinery 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.)

The credit applies to "retooling" purchased during the qualifying period if the retooling is capitalized and depreciated for federal income tax purposes.

New Manufacturing Machinery and Equipment. The new law defines "new manufacturing machinery and equipment" as manufacturing machinery and equipment, the original use in Ohio of which begins with the taxpayer or with a flow-through entity in which the taxpayer has an interest. Under this definition equipment is "new" if the taxpayer or flow-through entity is the first to use the equipment in Ohio. The taxpayer need not have been the first to use the equipment if the equipment had never been used in Ohio before the taxpayer purchased it. Thus, equipment that is first used outside Ohio by an unrelated party and is purchased from an unrelated party during the qualifying period is eligible for the credit if prior to the purchase the equipment had never been used in Ohio. In addition, the credit applies to "new" (not previously used in Ohio) manufacturing machinery and equipment that the taxpayer (or a flow-through entity in which the taxpayer has an interest) purchases during the qualifying period and first uses outside Ohio provided that the taxpayer or flow-through entity relocates the equipment to Ohio no later than December 31, 1999. Please note that the credit does not apply to equipment that the taxpayer purchased before July 1, 1995 and relocated to Ohio during the forty-two month period. The equipment must have been purchased during the forty-two month period beginning July 1, 1995 and ending December 31, 1998.

Purchase. The term "purchase" as used in the new law has the same meaning as in IRC section 179(d)(2); however, there are two modifications set forth below:

  • A "purchase" is considered to occur at the time the agreement to acquire the property becomes binding, and
      
  • There is not a "purchase" if the taxpayer or taxpayer's affiliate had directly or indirectly entered into a binding agreement to acquire the property at any time prior to July 1, 1995.

If for federal income tax purposes or if under generally accepted accounting principles a "lease" of qualifying equipment is considered a purchase of the equipment, the lease is also considered a purchase for purposes of the credit.

Cost. The term "cost", as used in the new law, 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 cost of the equipment for purposes of determining the credit is $4,000. The same definition of "cost" applies for purposes of determining the taxpayer's base investment for a county.

Eligible Areas. Eligible areas are those counties and municipalities annually designated and certified by the Director of the Department of Development based upon the economic criteria set forth in the new law (see ORC section 5733.33(A)(9),(10),(11),(12) and (13)). The eligible areas for the qualifying period beginning July 1, 1995 and ending December 31, 1995 are shown on the attached map. The Director must certify eligible areas for the qualifying periods (calendar years) 1996, 1997, and 1998 by January 1, 1996, January 1, 1997, and January 1, 1998 respectively. The credit rate for eligible areas is 13.5% and the credit rate for counties not designated as eligible areas is 7.5%. Please direct questions regarding the designation of an area as an eligible area to:

Office of Tax Incentives
Ohio Department of Development
P.O. Box 1001
Columbus, OH 43216-1001
or call
1-800-848-1300

Base Investment (County Average New Manufacturing Machinery and Equipment Investment). The base investment is determined by adding the cost of new manufacturing machinery and equipment purchased for use in the county during each of the calendar years 1992, 1993, and 1994 and dividing the total by three. The taxpayer and each flowthrough entity in which the taxpayer has an interest must separately determine a base investment for each county with respect to new manufacturing machinery and equipment purchased by each. We refer to the calendar years 1992, 1993 and 1994 as the "base years" (the base years do not roll forward). If a taxpayer or a flow-through entity purchased new manufacturing machinery and equipment for use in the county during a base year but the taxpayer or flow-through entity was not present in the county as a manufacturer for more than one year during the base years, then the taxpayer's or flow-through entity's base investment for the county is deemed to be zero. Also, the base investment is zero for those taxpayers and flow-through entities that did not have a presence in the county during any of the base years, and the base investment is zero for those taxpayers and flow-through entities that did have a presence but did not purchase new manufacturing machinery and equipment for use in the county during any of the base years.

Example

Acme, Inc. is a foreign corporation that has been licensed to do business in Ohio since 1987. Acme has operated a manufacturing plant in Franklin County from 1987 to the present. Prior to 1994, Acme's only Ohio manufacturing operations were at its Franklin County location. In March 1994 Acme established a new manufacturing plant in Madison County. During 1994 Acme purchased new manufacturing machinery and equipment for use in the Madison County plant at a cost of $450,000. Because Acme was not present in Madison County for more than one year during the three base years (the calendar years 1992, 1993 and 1994), Acme's base investment for Madison County is zero notwithstanding Acme's purchase of $450,000 of new manufacturing machinery and equipment during base year 1994 for use in Madison County.

The fact that Acme was "in existence" outside of Madison County (in Franklin County and outside Ohio) for more than one year during the base years is not relevant for purposes of determining Acme's base investment in Madison County. The Department of Taxation interprets the phrase "in existence" as used in ORC section 5733.33(A)(5) to mean "in existence in the county." Thus, for purposes of determining Acme's base investment in Madison County it is not relevant that Acme existed in any other Ohio County for more than one year during the base years, nor is it relevant that Acme existed outside Ohio for more than one year during the base years.

If, instead, Acme had established the Madison County plant in March 1993 and purchased the equipment in 1993, then Acme would have been in existence for more than one year in Madison County during the base years and Acme's base investment for Madison County would be $150,000 (the aggregate cost of new manufacturing machinery and equipment purchased for use in Madison County during the base years divided by three: 450,000 ÷ 3 = 150,000)

Note: If the taxpayer was in existence in the county for more than one year during the base years, then for purposes of determining the taxpayer's base investment divide the aggregate cost by three even if the taxpayer was not in existence in the county for the entire three year base period.

Analysis and Interpretations

  • A taxpayer-manufacturer that intends to claim the credit must file with the Department of Development a "notice of intent" on a form prescribed by the Department of Development. Attached to this information release is the prescribed notice of intent form for the qualifying period July 1, 1995 to December 31, 1995. Please send your request for additional forms to:

Office of Tax Incentives
Ohio Department of Development
P.O. Box 1001
Columbus, OH 43216-1001
or call
1-800-848-1300

If the manufacturer that purchases qualifying equipment is an LLC, a partnership, an S corporation or other flow-through entity, the flow-through entity, rather than the investors in the flow-through entity, must file the notice of intent.

A manufacturer must file a separate notice of intent for each county and for each eligible area for each qualifying period during which the manufacturer purchases or intends to purchase qualifying equipment on which the credit will be claimed. For example, a manufacturer that has operations in two Ohio counties and intends to claim the credit for purchases of qualifying equipment for both locations in both 1996 and 1997 must file a separate notice of intent for each county in both 1996 and 1997 (thus, a total of four notices). A manufacturer will neither be denied the credit nor otherwise penalized for purchasing qualifying property before it files the notice of intent.

  • Taxpayers must claim the credit over a seven year period. For qualifying equipment purchased during the period July 1, 1995 to December 31, 1995, a franchise taxpayer must claim one-seventh of the credit in each of the tax years 1997 through 2003, and an individual taxpayer must claim one-seventh of the credit in each of the taxable years 1996 through 2002. For qualifying equipment purchased, during the calendar years 1996, 1997 and 1998 a franchise taxpayer must claim one-seventh of the credit in each of the seven tax years following the calendar year in which the qualifying equipment was purchased and an individual taxpayer must claim one-seventh of the credit for the calendar year in which the qualifying equipment was purchased and one-seventh of the credit in each of the six following taxable years. See ORC section 5733.33(C)(4) and Section 5 of the bill.
       
  • If the new manufacturing machinery and equipment is sold by the taxpayer or partnership or is transferred by the taxpayer or partnership out of the county before the end of the seven-year period, the taxpayer is not allowed any remaining one-seventh credit amounts on the equipment sold, except for carried forward amounts (addressed on page 8). A franchise taxpayer that during the calendar year preceding the tax year sells qualifying equipment may not claim the one-seventh credit amount on that equipment for that tax year or for any subsequent tax year, and an individual taxpayer that during its taxable year sells qualifying equipment may not claim the one-seventh credit amount on that equipment for that taxable year or any subsequent taxable year. See ORC section 5733.33(C)(4).
        
  • The purchaser must use the property as a manufacturer. So a taxpayer may not claim the credit for purchases of qualifying equipment and may not claim a credit for equipment purchased by a flow-through entity in which the taxpayer has an interest if the taxpayer or the flow-through entity leases the property to another.
       
  • Taxpayers that claim the 20% credit under ORC section 5733.31 or 5747.26 (Senate Bill 269, 120th General Assembly) with respect to new manufacturing machinery and equipment purchased during the eighteen-month period January 1, 1995 to June 30, 1996 cannot also claim this newly-enacted credit with respect to the same machinery and equipment. See ORC section 5733.33(G).
       
  • A taxpayer's aggregate credit generated from qualifying equipment purchased for all Ohio locations during the period July 1, 1995 to December 31, 1995 is limited to one million dollars for the period if the taxpayer's cost of all manufacturing machinery and equipment owned in Ohio on December 31, 1995 does not exceed the lesser of (i) the taxpayer's cost of all manufacturing machinery and equipment owned in Ohio on July 1, 1995 or (ii) the taxpayer's cost of all manufacturing machinery and equipment owned in Ohio on January 1, 1995. A taxpayer's aggregate credit generated from qualifying equipment purchased for all Ohio locations during each of the qualifying periods 1996, 1997 and 1998 (that is, during the calendar years 1996, 1997 and 1998) is limited to one million dollars for the period if the taxpayer's cost of all manufacturing machinery and equipment owned in Ohio on the last day of the period does not exceed the taxpayer's cost of all manufacturing machinery and equipment owned in Ohio on the first day of the period. However, upon application by the taxpayer, the Director of the Department of Development may waive this provision if the Director determines that such a waiver is necessary to increase or retain employees in Ohio.

The apparent purpose of this provision is to limit the benefit of shifting manufacturing operations away from a county in which the taxpayer has a high base investment to one in which the taxpayer has a low base investment. See ORC section 5733.33(B)(3).

  • Franchise taxpayers must claim this new credit in the order established by ORC section 5733.98 as amended by the new law, and individual taxpayers must claim this new credit in the order established by ORC section 5747.98 as amended by the new law. The order of the credits is important because certain credits have no carryforward period or a limited carryforward after which the unused amount expires. See ORC sections 5733.33(D) and 5747.31(C)(2).
        
  • As stated on page 6, franchise taxpayers and individual taxpayers must claim one-seventh of this nonrefundable credit in each of seven years. However, if for any year of the seven year period a taxpayer is unable to utilize its one-seventh credit amount or a portion of the one-seventh amount (because the one-seventh amount when added to the taxpayer's credits that precede this credit in the order established by ORC section 5733.98 and ORC section 5747.98 exceed the tax due before nonrefundable credits), the taxpayer may carry forward for three years the unused portion of the one-seventh amount. Of course, the amount of credit used in any year is deducted from the balance carried forward to subsequent years. Amounts not used within the three-year carryforward period expire. See ORC section 5733.33(D).
         
  • If a franchise taxpayer acquires manufacturing machinery and equipment as a result of merger with either (1) a corporation with whom commenced the original use in Ohio of qualifying equipment or (2) a corporation that was a partner in a partnership which whom commenced the original use in Ohio of qualifying equipment, the taxpayer is entitled to any remaining one-seventh credit amounts and to any remaining carryforward amounts to which the merged corporation was entitled. See ORC section 5733.33(C)(5)(a).

Determining the Taxpayer's Credit for Qualifying Equipment Purchased by a
Flow-Through Entity in which the Taxpayer Has an Interest.

As noted earlier, the credit applies to corporation franchise taxpayers and to individual taxpayers that own an interest in flow-through entities that purchase and install qualifying equipment. The credit for qualifying equipment purchased by a flow-through entity is not computed at the flow-through entity level and then claimed as a distributive share by the taxpayers that have an interest in the flow-through entity. Instead, taxpayers that have an interest in a flow-through entity during a qualifying period in which the flow-through entity purchased qualifying equipment must claim a distributive share of the cost of such equipment and a distributive share of the flow-through entity's base investment in the county for which the qualifying equipment was purchased. For each period and for each county and eligible area such distributive share amounts are then added to the distributive share amounts from other flow-through entities in which the taxpayer has an interest and to the taxpayer's own purchases of qualifying equipment and base investment. The taxpayer must compute the credit after aggregating its distributive share amounts with the taxpayer's own purchases and the taxpayer's own base investment. See ORC section 5733.33(H).

A taxpayer's distributive share of a flow-through entity's base investment is determined by multiplying the flow-through entity's base investment by the taxpayer's interest in the flow-through entity during the period in which the flow-through entity purchased the qualifying equipment. Thus, if the taxpayer's interest changes, from one qualifying period to another the base investment will change. (A taxpayer's distributive share of a flow-through entity's base investment is not determined by multiplying the flow-through entity's base investment by the taxpayer's interest in the flow-through entity during the base years or by the taxpayer's interest in the flow-through entity during the seven year period over which the credit is claimed). If the flow-through entity did not have a presence in the county for more than one year during the base years, then the flow-through entity's base investment for the county is zero, and, of course, each taxpayer's distributive share of the flow-through entity's base investment is zero.

As noted above, a taxpayer is entitled to the credit based upon the taxpayer's distributive share amounts during the period in which the flow-through entity purchased the qualifying equipment. A taxpayer is not entitled to claim any credit for the qualifying equipment that was purchased by a flow-through entity during a period in which the taxpayer did not have an interest in the flow-through entity. Furthermore, a taxpayer may not claim the credit based upon its interest in the flow-through entity during the seven-year period over which the credit is claimed.

The taxpayer is entitled to its entire credit even if during the seven year period over which the credit is claimed the taxpayer sells its interest in the flow-through entity. However, as noted earlier, if during the seven year period over which the credit is claimed the flow-through entity sells the qualifying equipment, the taxpayer is not allowed any remaining credit amount except for unused carry-forward amounts.

Observations and Comments

  • Because the credit for each county and each eligible area for each period stands alone and because the base investment for a county is subtracted from the cost of qualifying equipment purchased during each period, a taxpayer could maximize its credit by purchasing all of the qualifying equipment for use in a particular county or eligible area entirely within one of the four qualifying periods (rather than spreading those purchases out over the four periods). In determining the credit for equipment purchased during the six month period July 1, 1995 to December 31, 1995, the cost of the purchases is not annualized; nor is the base investment adjusted. Thus, the cost of purchases during the six month period will be compared with a base investment that is a yearly average.
       
  • The 13.5% credit rate applies to qualifying equipment purchased for use in an eligible area during the qualifying period for which the eligible area designation applies. Of course, the eligible areas may change from year to year. An area's status during the year the equipment was purchased controls the rate of the credit (the area's status during the remainder of the seven year period during which the credit is claimed is not relevant). If during the period in which the qualifying equipment was purchased an area is an eligible area, then the 13.5% credit rate applies to the entire seven year period over which the credit for that equipment is claimed even if the area is not an eligible area for the entire seven year period.
      
  • As noted earlier, the credit rate for eligible areas is 13.5% of the amount by which the taxpayer's cost of qualifying equipment purchased during a qualifying period for use in the eligible area exceeds the taxpayer's base investment for the county. Although a municipality within an Ohio county can be an eligible area, the base investment is always the average cost of new manufacturing machinery and equipment purchased during the base years for use in the entire county in which the municipality is located. Thus, if the eligible area is a municipality, the taxpayer must determine its credit for a qualifying period by multiplying the 13.5% rate times the amount by which the taxpayer's cost of qualifying equipment purchased during the qualifying period for use in the municipality exceeds the taxpayer's base investment for the entire county (not the taxpayer's base investment for the municipality).
       
  • Unlike the ORC section 5733.31 20% credit, this new credit has no "component member" test. Thus, in determining whether a taxpayer is eligible for the credit, the purchases of qualifying equipment and the base investment of the taxpayer's parent and the taxpayer's subsidiaries and sister corporations are not considered.
       
  • The Department of Taxation is in the process of writing examples that illustrate our interpretation of this new law. We intend to issue an information release containing the examples in the near future.

*   *   *   *    *

Tax Information Releases are not "Opinions of the Tax Commissioner" within the meaning of ORC section S703.S3.However, the above discussion does reflect the Income Tax Audit Division's Interpretation of the law.

_______________________________

1Terms that are in bold print are defined in the new law. The definitions of these terms begin on page 2.