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rescinded a portion of the sentence appearing immediately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.