Information Release

Note to Taxpayers: A subsequent income tax information release issued June 18, 1996 revised certain provisions of the release below as it pertains to the provisions explained in example #4. Please refer to the later release for clarification.

Examples setting forth the Division's interpretation of Ohio Revised code sections 5733.33 and 5747.31, "Second Credit for Purchases of New Manufacturing Machinery and Equipment." - May 6, 1996

This information release sets forth several examples of the Division's interpretation of Ohio Revised Code ("ORC") sections 5733.33 and 5747.31, "Second Credit for Purchases of New Manufacturing Machinery and Equipment."1 In addition, attached to this information release are (i) the Ohio Department of Development's 1996 Notice of Intent to Claim the Credit, (ii) an Ohio map setting forth the 1996 eligible areas for which the higher 13.5% credit rate applies, and (iii) a chart which reflects the Ohio individual income tax returns and franchise tax reports on which taxpayers may claim the credit generated from purchases of qualifying equipment in the second half of 1995 and in each of the calendar years 1996, 1997 and 1998.

Example #1

DEF Corporation, a June 30 fiscal year C corporation, is a manufacturer subject to Ohio's corporation franchise tax. DEF Corporation purchases new manufacturing machinery and equipment during the second half of calendar year 1995 and during calendar years 1996 and 1997 for its facilities in three Ohio counties.2 For each county for each year the taxpayer files with the Ohio Department of Development the prescribed notice of intent to claim the credit.3 Set forth below is pertinent data necessary to calculate the ORC section 5733.33 credit:

  • Cost4 of new manufacturing machinery and equipment purchased for cash (without trade-in) and immediately installed:5
Year6 County A County B County C
1992 $10,000

- 0 -

N/A7
1993 $15,000 $ 9,000 N/A
1994 $20,000 $12,000 $15,000

1995
(2nd half)

$40,000

$50,000

$60,000

1996

$70,000

$80,000

$90,000

1997

$ 7,000

$81,000

$91,000

1998

- 0 -

- 0 -

- 0 -

  • During calendar year 1998 the DEF Corporation disposes of its machinery and equipment which it had acquired in 1995 and had located in Ohio County A.   Except for the 1998 disposition of the 1995 Ohio County A qualifying property, at no time prior to January 1, 2003 does DEF dispose of any remaining qualifying property purchased during the second half of 1995, and at no time prior to the end of the six year period beginning on January 1 following the date of purchase of post-1995 qualifying property does DEF dispose of such property. For purposes of this credit, dispositions include moving the equipment out of the county or eligible area for which the equipment was purchased.
         
  • During 1995 through 1998 Ohio Counties A, B, and C are not and do not contain within their boundaries "eligible areas" as defined in ORC section 5733.33(A)(9).
       
  • During the period July 1, 1995 through December 31, 1998 the DEF Corporation has no investments in any pass-through entities.8
        
  • DEF Corporation's franchise tax for each of tax years 1997 through and including 2005 after reduction for all credits allowed prior to claiming the 7.5%/13.5% credit is greater than the 7.5%/13.5% credit which the taxpayer will claim.9
        
  • The corporation claims neither the original 20% credit (ORC section 5733.31) nor the alternative 20% credit (ORC section 5733.311) with respect to the purchased property.10

Set forth below is the computation of DEF's 7.5% credit:

Part I:  Calculation of Base Investment
("County Average New Manufacturing Machinery and Equipment Investment")

Ohio County A Base Investment:

  • Cost of new manufacturing machinery and equipment purchased for use in Ohio County A during the 1992 calendar year

$ 10,000

  • Cost of new manufacturing machinery and equipment purchased for use in County A during the 1993 calendar year

$15,000

  • Cost of new manufacturing machinery and equipment purchased for use in County A during the 1994 calendar year

$20,000

Total
Averaging Factor

$45,000
        ÷ 3

Ohio County A base investment

$15,000

Ohio County B Base Investment:

  • Cost of new manufacturing machinery and equipment purchased for use in County B during the 1992 calendar year

-0-

  • Cost of new manufacturing machinery and equipment purchased for use in County B during the 1993 calendar year

$9,000

  • Cost of new manufacturing machinery and equipment purchased for use in County B during the 1994 calendar year

$12,000

Total
Averaging Factor

$21,000
        ÷ 3

Ohio County B base investment

$7,000

Ohio County C Base Investment:

Since the taxpayer was not present in Ohio County C as a manufacturer for more than one year during calendar years 1992, 1993 and 1994, then even though during 1994 the taxpayer purchased $15,000 of new manufacturing machinery and equipment for use in County C, the Ohio County C base investment is . . .

$ -0-11

Part II: Calculation of Yearly Credit Generated by 1995 (second half) Purchases
            

Cost of new manufacturing machinery and equipment purchased during the second half of 1995 for use in Ohio County A12

$40,000

Less: Ohio County A base investment (from Part I, page 4)

<$15,000>

Ohio County A. 1995 (second half) excess qualifying purchases

$25,000

Cost of new manufacturing machinery and equipment purchased during the second half of 1995 for use in Ohio County B

$50,000

Less: Ohio County B base investment (from Part I, page 4)

<$7,000>

Ohio County B 1995 (second half) excess qualifying purchases

$43,000

Cost of new manufacturing machinery and equipment purchased during the second half of 1995 for use in Ohio County C

$60,000

Less: Ohio County C base investment (from Part I, page 4)

< -0- >

Ohio County C 1995 (second half) excess qualifying purchases

$60,000

Total 1995 (second half) excess qualifying purchases
Credit rate
Credit generated
Yearly adjustment factor

$128,00013
  x.075
$9,600
  x 1/7

Yearly credit attributable to 1995 (second half) purchases

$1,371

Note #1: DEF Corporation cannot claim any of this credit on its 1996 Ohio corporation franchise tax report but can begin claiming this amount on the 1997 report. See noncodified section 5 of Am. Sub. S. B. No. 188, 121st General Assembly.

Note #2: With respect to the 1995 (second half) purchases the DEF Corporation can also claim a $1,371 credit on its Ohio corporation franchise tax reports filed for each of tax years 1998 through and including 2003 only if, for each of those tax years, at no time during the calendar year immediately prior to the first day of the respective tax year does the DEF Corporation either sell the 1995 qualifying manufacturing machinery and equipment or transfer the 1995 machinery and equipment out of the Ohio county in which DEF installed the machinery and equipment. However, in this example during 1998 the DEF Corporation did sell all $40,000 of its Ohio County A 1995 new manufacturing machinery equipment which had generated a yearly credit of $268 (1995 County A excess qualifying purchases of $25,000 x credit rate of 7.5% x  yearly adjustment factor of 1/7); so, on each of the corporation's 1999, 2000, 2001, 2002, and 2003 reports the DEF Corporation will be able to claim a credit of only $1,103 ($1,371 original yearly credit (for all three counties) less $268 reduction in yearly credit).14

Part III: Calculation of Yearly Credit Generated by 1996 Purchases
       

Cost of new manufacturing machinery and equipment purchased in 1996 for use in Ohio County A

$ 70,000

Less: Ohio County A base investment (from Part I, page 4)

<$ 15,000>

Ohio County A 1996 excess qualifying purchases

$55,000

Cost of new manufacturing machinery and equipment purchased in 1996 for use in Ohio County B

$80,000

Less:  Ohio County B base investment (from Part I, page 4)

<$ 7,000>

Ohio County B 1996 excess qualifying purchases

$73,000

Cost of new manufacturing machinery and equipment purchased in 1996 for use in Ohio County C

$90,000

Less: Ohio County C base investment (from Part I, page 4)

<$ - 0 - >

Ohio County C 1996 excess qualifying purchases

$90,000

Total 1996 excess qualifying purchases
Credit rate
Credit generated
Yearly adjustment factor

$218,000
     x .075
$16,350
       x 1/7

Yearly credit attributable to 1996 purchases

$2,236

Note: The DEF Corporation can claim this $2,336 credit on each of its Ohio corporation franchise tax reports for tax years 1997 through and including 2003 because at no time during the calendar year immediately prior to the first day of the respective tax year did the DEF Corporation either sell the 1996 qualifying manufacturing machinery and equipment or transfer the 1996 machinery and equipment out of the Ohio County in which the machinery and equipment was installed. If DEF Corporation were to sell or transfer such property, then for those tax years following the date of such sale or transfer the DEF Corporation could not claim any credit relating to such machinery and equipment (see footnote 14 on page 6).

Part IV: Calculation of Yearly Credit Generated by 1997 Purchases
   

Cost of new manufacturing machinery and equipment purchased in 1997 for use in Ohio County A

$ 7,000

Less: Ohio County A base investment (from Part I, page 4)

<$ 15,000>

Ohio County A 1997 excess qualifying purchases

$ - 0 -

Cost of new manufacturing machinery and equipment purchased in 1997 for use in Ohio County B

$81,000

Less:  Ohio County B base investment (from Part I, page 4)

<$ 7,000>

Ohio County B 1997 excess qualifying purchases

$74,000

Cost of new manufacturing machinery and equipment purchased in 1997 for use in Ohio County C

$91,000

Less: Ohio County C base investment (from Part I, page 4)

<$ - 0 - >

Ohio County C 1997 excess qualifying purchases

$91,000

Total 1997 excess qualifying purchases
Credit rate
Credit generated
Yearly adjustment factor

$165,000
x .075
$12,375
x 1/7

Yearly credit attributable to 1997 purchases

$1,768

Note #1: The DEF Corporation can claim the $1,768 credit on each of its Ohio corporation franchise tax reports for tax years 1998 through and including 2004 because at no time during the calendar year immediately prior to the first day of the respective tax year did the DEF Corporation either sell the 1997 qualifying manufacturing machinery and equipment or transfer the 1997 machinery and equipment out of the Ohio County in which the machinery and equipment was installed. If DEF Corporation were to sell or transfer such property, then for those tax years following the date of such sale or transfer the DEF Corporation could not claim any credit relating to such machinery and equipment.

Note #2: Had DEF Corporation accelerated into the 1996 calendar year the company's $7,000 of 1997 Ohio County A purchases, the entire $7,000 would have qualified for the credit since other 1996 Ohio County A purchases exceeded the $15,000 Ohio County A base investment. Thus, in order to maximize the credit, it is important for taxpayers to consider purchasing in one year all of the qualifying equipment for a particular county or for a particular eligible area.

Part V: Calculation of Yearly Credit Generated by 1998 Purchases
  
Since DEF Corporation did not purchase any new manufacturing machinery and equipment during 1998, DEF generated no credit during the 1998 calendar year.
  
Part VI: Summary of Credits Claimed (refer to table on page 22) $ - 0 -15
      
1996 Ohio Corporation Franchise Tax Report
1997 Ohio Corporation Franchise Tax Report

1/7 of the credit generated from 1995 purchases
1/7 of the credit generated from 1996 purchases

$1,371
$2,336

Total ORC section 5733.33 credit claimed on 1997 report.

$3,707
1998 Ohio Corporation Franchise Tax Report
     

1/7 of the credit generated from 1995 purchases
1/7 of the credit generated from 1996 purchases
1/7 of the credit generated from 1997 purchases

$1,371
$2,336
$1,768

Total ORC section 5733.33 credit claimed on 1998 report.

$5,475
1999 through and including 2003 Ohio Corporation Franchise Tax Reports16
     

1/7 of the remaining credit generated from 1995 purchases
1/7 of the credit generated from 1996 purchases
1/7 of the credit generated from 1997 purchases
1/7 of the credit generated from 1998 purchases

$1,01317
$2,336 $1,768
$ - 0 -18

Total ORC section 5733.33 credit claimed on each of the 1999 through and including 2003 reports

$5,207
2004 Ohio Corporation Franchise Tax Report
     

1/7 of the credit generated from 1997 purchases
1/7 of the credit generated from 1998 purchases

$1,768
$ - 0 -

Total ORC section 5733.33 credit claimed on the 2004 report

$1,768
2005 Ohio Corporation Franchise Tax Report
    

1/7 of the credit generated from 1998 purchases

$ - 0 -
Post-2005 Ohio Corporation Franchise Tax Report N/A

Example #2

Same facts as in Example #1 except that the DEF Corporation is also a partner in the XYZ Partnership which is an Ohio manufacturer only in County A. Set forth below is information about DEF Corporation's investment in the XYZ partnership:

  • XYZ Partnership's cost of new manufacturing machinery and equipment purchased for cash for use in Ohio County A during calendar years 1992, 1993, and 1994: $70,000, $79,000, and $91,000, respectively.
       
  • XYZ Partnership's purchases for cash of new manufacturing machinery and equipment during (i) the second half of calendar year 1995 (ii) calendar year 1996, and (iii) calendar year 1997: $57,000, $58,000, and $59,000, respectively.19 XYZ made no such purchases during 1998. The new manufacturing machinery and equipment was installed in Ohio County A by December 31, 1999.
      
  • The DEF Corporation claims neither the original 2% credit (ORC section 5733.31) nor the alternative 20% credit (ORC section 5733.311) with respect to the property purchased by the XYZ Partnership.
      
  • DEF Corporation's ownership interest in XYZ Partnership during each of calendar years 1992, 1993 and 1994: irrelevant.20
        
  • DEF Corporation's ownership interest in the XYZ Partnership during calendar years 1995, 1996, and 1997: 10%, 20%, and 30%, respectively.

Set forth below is the computation of the ORC section 5733.33 credit

Part I:     Calculation of XYZ Partnership's Base Investment ("County Average New Manufacturing Machinery and Equipment Investment")
 
  • XYZ Partnership's cost of new manufacturing machinery and equipment purchased for use in County A during the 1992 calendar year

$70,000

  • XYZ Partnership's cost of new manufacturing machinery and equipment purchased for use in County A during the 1993 calendar year
$79,000
  • XYZ Partnership's cost of new manufacturing machinery and equipment purchased for use in County A during the 1994 calendar year
$91,000
Total $240,000
Averaging Factor
XYZ Partnership's Ohio County A base investment
         ÷ 3
$80,000
Part II: Calculation of Yearly Credit Generated by 1995 Purchases
     

DEF's cost of new manufacturing machinery and equipment purchased during the second half of 1995 for use in Ohio County A (from Example #1, page 2).

$40,000

DEF's distributive share of XYZ's cost of new manufacturing machinery and equipment purchased during the second half of 1995 for use in Ohio County A (DEF's 10% interest in the XYZ Partnership during the last six months of 1995 X $57,000)

$5,700

Less: DEF's stand-alone Ohio County A base investment (From Example #1, Part I, page 4)

<$ 15,000>

Less: DEF's Distributive share of XYZ Partnership's Ohio County A base investment (DEF's 10% interest in the XYZ Partnership during the last six months of 1995 X $80,000)

<$8,000>21

Ohio County A 1995 (second half) excess qualifying purchases

$22,700

Ohio County B 1995 (second half) excess qualifying purchases (from Part II of Example #1, page 5)

$43,000

Ohio County C 1995 excess qualifying purchases (from Example #1, Part II, page 5)

$60,000

Total 1995 (second half) excess qualifying purchases
Credit rate
Yearly adjustment factor

$125,700
x  .75
     x  1/7

Yearly credit attributable to 1995 (second half) purchases (see Part VI on pages 13, 14, and 15 which sets forth when the taxpayer can claim the credit amounts)

$1,347
Part III: Calculation of Yearly Credit Generated by 1996 Purchases
      

DEF's cost of new manufacturing machinery and equipment purchased in 1996 for use in Ohio County A (from Example #1, Page 2)

$ 70,000

DEF's distributive share of XYZ's cost of new manufacturing machinery and equipment purchased in 1996 for use in Ohio County A (DEF's 20% interest in the XYZ Partnership during 1996 X $58,000)

$ 11,600

Less:  DEF's stand-alone Ohio County A base investment (from Example #1, Part I, page 4)

<$15,000>

Less:  DEF's distributive share of XYZ Partnership's Ohio County A base investment (DEF's 20% interest in the XYZ Partnership during 1996 x $80,000)

<$16, 000>

Ohio County A 1996 excess qualifying purchases

$ 50,600

Ohio County B 1996 excess qualifying purchases (same as Example #1, Part  III, on page 6)

$ 73,000

Ohio County C 1996 excess qualifying purchases (same as Example #1, Part III, on page 7)

$ 90,000

Total 1996 excess qualifying purchases
Credit rate
Yearly adjustment factor

$213,600
x .075
      X 1/7

Yearly credit attributable to 1996 purchases (see Part VI on pages 13, 14, and 15 which sets forth when the taxpayer can claim the credit amounts)

$2,289
Part IV: Calculation of Yearly Credit Generated by 1997 Purchases
     

DEF's cost of new manufacturing machinery and equipment purchased in 1997 for use in Ohio County A (from Example #1, page 2)

$7,000

DEF's distributive share of XYZ's cost of new manufacturing machinery and equipment purchased in 1997 for use in Ohio County A (DEF's 30% interest in the XYZ Partnership during 1997 X $59,000)

$17,700

Less:  DEF's stand-alone Ohio County A base investment (from Part I, Example #1, page 4)

<$15,000>

Less: DEF's Distributive Share of XYZ Partnership's Ohio County A base investment (DEF's 30% interest in the XYZ Partnership during 1997 X $80,000)

<$24,000>

Ohio County A 1997 excess qualifying purchases

$   -0-

Ohio County B 1997 excess qualifying purchases (same as Example #1 Part IV, on page 7)

$  74,000

Ohio County C 1997 excess qualifying purchases (same as Example #1 Part IV, on page 7)

$  91,000

Total 1997 excess qualifying purchases
Credit rate
Yearly adjustment factor

$165,600
x .075
      X 1/7

Yearly credit attributable to 1997 purchases (see Part VI on pages 13, 14, and 15 which sets forth when the taxpayer can claim the credit amounts)

$  1,768
Part V: Calculation of Yearly Credit Generated by 1998 Purchases

Since neither the DEF Corporation nor the XYZ Partnership purchased any new manufacturing machinery and equipment during 1998, there is no credit generated during the 1998 calendar year.

Part VI: Summary of Credits Claimed (refer to table on page 22)
1996 Ohio Corporation Franchise Tax Report $   -0-22
1997 Ohio Corporation Franchise Tax Report
    

1/7 of the credit generated from 1995 purchases 
1/7 of the credit generated from 1996 purchases

$1,347
$2,289

Total ORC section 5733.33 credit claimed on the 1997 report.

$  3,636
1998 Ohio Corporation Franchise Tax Report
   

1/7 of the credit generated from 1995 purchases
1/7 of the credit generated from 1996 purchases
1/7 of the credit generated from 1997 purchases

$1,347
$2,289
$1,768

Total ORC section 5733.33 credit claimed on the 1998 report

$  5,404
1999 through and including 2003 Ohio Corporation Franchise Tax Reports
   

1/7 of the revised credit generated from 1995 purchases23
1/7 of the credit generated from 1996 purchases
1/7 of the credit generated from 1997 purchases
1/7 of the credit generated from 1998 purchases

$1,104
$2,289
$1,768
$ -0- 24

Total ORC section 5733.33 credit claimed on each of the 1999 through and including 2003 reports

$ 5,161
2004 Ohio Corporation Franchise Tax Report
   

1/7 of the credit generated from 1997 purchases 
1/7 of the credit generated from 1998 purchases

$1,768
    $ -0-

Total ORC section 5733.33 credit claimed on the 2004 report

$ 1,768
2005 Ohio Corporation Franchise Tax Report
    

1/7 of the credit generated from 1998 purchases

    $ -0-

Total ORC section 5733.33 credit claimed on the 2005 report

$ -0-
Post-2005 Ohio Corporation Franchise Tax Reports   N/A

Example #3

Lee is the sole proprietor of a small manufacturing business in Ohio County E. Lee also has an investment in S Inc., an S corporation with manufacturing operations in Ohio County E. Each year the taxpayer and the S corporation separately file with the Ohio Department of Development the prescribed notice of intent to claim the credit. Lee claims neither the original 20% credit (ORC section 5747.26) nor the alternative 20% credit (ORC section 5747.261) with respect to the purchased property (detailed below). Set forth below is the information necessary to calculate Lee's ORC section 5747.31 credit:

  • Lee's cost of new manufacturing machinery and equipment purchased through the sole proprietorship for use in Ohio County E during calendar years 1992, 1993, and 1994: $10,000, $15,000, and $20,000, respectively.
        
  • Lee's cost of new manufacturing machinery and equipment purchased through the sole proprietorship during the second half of calendar year 1995, (ii) calendar year 1996, (iii) calendar year 1997, and iv) calendar year 1998: $40,000, $70,000, $7,000, and -0- respectively. All new manufacturing machinery and equipment was installed in Ohio County E by December 31, 1999.
        
  • During 1995 through 1998 Ohio County E is not and does not contain within its boundaries an eligible area as defined in ORC section 5733.33(A)(9).
         
  • Lee's individual income tax for each of the years 1996 through and including 2004 after reduction for all credits allowed prior to claiming the ORC section 5747.31 credit is greater than any 7.5%/13.5% credit (see footnote 9 on page 3).

Set forth below is information about Lee's investment in S Inc., an S corporation:

  • S Inc.'s cost of new manufacturing machinery and equipment purchased for use in Ohio County E during calendar years 1992, 1993, and 1994: $70,000, $79,000, and $91,000, respectively.
        
  • S Inc.'s purchases of new manufacturing machinery and equipment during (i) the second half of calendar year 1995 (ii) calendar year 1996, (iii) calendar year 1997, and (iv) calendar year 1998: $57,000, $58,000, $154,333, and -0-, respectively. All new manufacturing machinery and equipment was installed in Ohio County E by December 31, 1999.
        
  • Lee's ownership interest in S Inc. during each of calendar years 1992, 1993 and 1994:  irrelevant.25
       
  • Lee's ownership interest in S Inc. during calendar years 1995, 1996 and 1997: 10%, 20%, and 30%, respectively.

Set forth below is the computation of Lee's ORC section 5747.31 credit:

Part I: Calculation of County E Base Investment:
    

Lee's stand-alone Ohio County E Base Investment:

  • Lee's cost of new manufacturing machinery and equipment which Lee purchased for use in Ohio County E during the 1992 calendar year
$10,000
  • Lee's cost of new manufacturing machinery and equipment which Lee purchased for use in County E during the 1993 calendar year
$15,000
  • Lee's cost of new manufacturing machinery and equipment which Lee purchased for use in County E during the 1994 calendar year
$20,000

Total
Averaging Factor

$45,000
         ÷ 3

Lee's stand-alone Ohio County E base investment

$15,000

S Inc.'s Ohio County E Base Investment:

  • S Inc.'s cost of new manufacturing machinery and equipment which S Inc. purchased for use in County E during the 1992 calendar year
$70,000
  • S Inc.'s cost of new manufacturing machinery and equipment which S Inc. purchased for use in County E during the 1993 calendar year
$79,000
  • S Inc.'s cost of new manufacturing machinery and equipment which S Inc. purchased for use in County E during the 1994 calendar year
$91,000

Total
Averaging Factor
S Inc's Ohio County E base investment

$240,000
         ÷ 3
  80,000
Part II: Calculation of Lee's Yearly Credit Generated by 1995 Purchases
    

Lee's cost of new manufacturing machinery and equipment purchased in 1995 (second half) for use in Ohio County E

$40,000

Lee's distributive share of S Inc.'s cost of new manufacturing machinery and equipment purchased in 1995 for use in Ohio County E (10%  x $57,000)

$ 5,700

Less: Lee's stand-alone Ohio County E base investment

<$15, 000>

Less: Lee's distributive share of S Inc.'s County E base investment: Lee's 1995 ownership interest in S Inc. times S Inc.'s Ohio County E base investment (10%  x $80,000)

<$ 8, 000>

Total 1995 (second half) excess qualifying purchases
Credit rate
Yearly adjustment factor

$22,700
x .075
    x    1/7

Yearly credit attributable to 1995 (second half) purchases (see Part VI on pages 19 and 20 which sets forth when the taxpayer can claim the credit amounts)

      $ 243
Part III: Calculation of Lee's Yearly Credit Generated by 1996 Purchases
   

Lee's cost of new manufacturing machinery and equipment purchased in 1996 for use in Ohio County E

$70,000

Lee's distributive share of S Inc.'s cost of new manufacturing machinery and equipment purchased in 1996 for use in Ohio County (20%  x $58,000)

$11,600

Less: Lee's stand-alone Ohio County E base investment

<$15, 000>

Less: Lee's distributive share of S Inc.'s County E base investment:  Lee's 1996 ownership interest in S Inc. times S Inc.'s Ohio County E base investment (20% x $80,000)

<$16 , 000>

Total 1996 excess qualifying purchases
Credit rate
Yearly adjustment factor

$50,600
x .075
      x 1/7

Yearly credit attributable to 1996 purchases (see Part VI on pages 19 and 20 which sets forth when the taxpayer can claim the credit amounts)

$ 542
Part IV: Calculation of Lee's Yearly Credit Generated by 1997 Purchases
     

Lee's cost of new manufacturing machinery and equipment purchased in 1997 for use in Ohio County E

$ 7,000

Lee's distributive share of S Inc.'s cost of new manufacturing machinery and equipment purchased in 1997 for use in Ohio County E (30% x $154,333)

$46,300

Less: Lee's stand-alone Ohio County E base investment for Lee's own purchases

<$15, 000>

Less: Lee's distributive share of S Inc.'s County E base investment: Lee's 1997 ownership interest in S Inc. times S Inc.'s Ohio County E base investment (30%  x $80,000)

<$24 , 000>

Total 1997 excess qualifying purchases
Credit rate
Yearly adjustment factor

$14,300
x .075
       x 1/7

Yearly credit attributable to 1997 purchases (see Part VI on pages 19 and 20 which sets forth when the taxpayer can claim the credit amounts)

$      153
Part V: Calculation of Lee's Yearly Credit Generated by 1998 Purchases
           

Since neither Lee nor S Inc. purchased any new manufacturing machinery and equipment during 1998, there is no credit generated in 1998.

Part VI: Summary of Lee's Credits Claimed26 (refer to the table on page 22)
  
1995 Ohio Individual Income Tax Return      $ -0-27
  
1996 Ohio Individual Income Tax Return
  

1/7 of the credit generated from 1995 purchases 
1/7 of the credit generated from 1996 purchases

$ 243
$ 542

Total ORC section 5747.31 credit claimed on 1996 return

$ 785
1997 Ohio Individual Income Tax Return
  

1/7 of the credit generated from 1995 purchases 
1/7 of the credit generated from 1996 purchases 
1/7 of the credit generated from 1997 purchases

$ 243
$ 542
$ 153

Total ORC section 5747.31 credit claimed on the 1997 return

$ 938
1998 through and including 2002 Ohio Individual Income Tax Returns
  

1/7 of the credit generated from 1995 purchases
1/7 of the credit generated from 1996 purchases
1/7 of the credit generated from 1997 purchases
1/7 of the credit generated from 1998 purchases

$ 243
$ 542
$ 153
$ -0-28

Total ORC section 5747.31 credit claimed on each of the 1998 through 2002 returns

$ 938
2003 Ohio Individual Income Tax Return
   

1/7 of the credit generated from 1997 purchases 
1/7 of the credit generated from 1998 purchases 

$ 153
$ -0-

Total ORC section 5733.33 credit claimed on the 2003 return

$ 153
2004 Ohio Individual Income Tax Return
  

1/7 of the credit generated from 1998 purchases

$ -0-

Total ORC section 5747.31 credit claimed on the 2004 return

$ -0-
Post-2004 Ohio Individual Income Tax Returns N/A

Example #4

(Note: Please refer to the information release issued June 18, 1996 for revisions to this section). During 1996 a taxpayer purchased for use in Ohio County E new manufacturing machinery and equipment costing $201. The taxpayer located $99 of the new equipment at its facility in an eligible area within the county; the taxpayer located $102 at another facility not in the eligible area. The taxpayer's base investment for the county is $100.

The total amount eligible for the 7.5%/13.5% credit is $101:

Purchases of qualifying equipment for entire county $201
Base investment for the county $100
Excess amount eligible for credit $101

In determining the amount eligible for the 13.5% credit, the taxpayer's purchases of $99 for the eligible area must be reduced by the taxpayer's $100 base investment (see ORC 5733.33(C)(2)). Under current law there is no concept of a separate "base investment" for an eligible area. Since eligible area purchases do not exceed the base investment, no amount is eligible for the 13.5% credit rate.29 As such, the entire $101 is subject to the 7.5%. credit rate:

Entire County (including
eligible area)

Eligible Area
Within County

Purchases of qualifying equipment
Base investment for the county
Excess
  
$201
- $100
$101
$ 99
- $100
$  0
Excess subject to 13.5% rate
   
     $  0
Less: excess subject to 13.5%
   
     $  0
Amount subject to 7.5% rate $101

Example #5

During 1996 a taxpayer purchased for use in Ohio County E new manufacturing machinery and equipment costing $300. At the time the qualifying equipment was purchased the county itself was not an eligible area, but the county contained within its boundaries a municipality a portion of which was an eligible area. The taxpayer located $275 of the qualifying equipment at its facility in the eligible area and $25 at another facility not in the eligible area. The taxpayer's base investment for the county is $200.

The taxpayer's credit is determined as follows:

Entire County (including
eligible area)

Eligible Area
Within County

Purchases of qualifying equipment
Base investment for the county
Excess
  
$300 
<$200>
$100 
$275 
<$200>
$  75  
Excess subject to 13.5% rate
  
     $  75  
Less: excess subject to 13.5%
  
  <$   75>   
Excess subject to 7.5% rate
  
$   25     
Credit rate
Credit amount
x .075     
$  1.88
x .135      
$  10.13

Total Credit = $1.88 + $10.13 = $12.01

A taxpayer is not entitled to both the 13.5% and 7.5% credit on the same equipment. The excess that is subject to the 13.5% credit rate must be subtracted from excess that is subject to the 7.5% credit rate.

*   *   *   *    *

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

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1For the sake of brevity, we refer to this new credit as the "7.5%/13.5% credit" or just the "7.5% credit." For more information please see the Division's September 22, 1995 information release.

2For the definition of "new manufacturing machinery and equipment" see page 3 of the Division's September 22, 1995 information release.

3The law does not state when the taxpayer must file the notice; nor does law set forth any sanction or penalty for failure to file the notice.

4ORC section 5733.33(A)(14) states that the term, "cost," has the same meaning as in Internal Revenue Code ("IRC") section 179(d)(3). IRC section 179(d)(3) states that for purposes of IRC section 179, the cost of property does not include so much of the basis of such property as is determined by reference to the basis of other property held at any time by the person acquiring such property. Since these examples expressly state that the taxpayer is paying cash (and is not "trading in" any other property), the cost of the purchased property equals the cash paid.

5The law requires that the taxpayer install the new manufacturing machinery and equipment by December 31, 1999 in the county for which the credit is determined. However, a taxpayer can claim the credit in anticipation of the installation date, but if the taxpayer fails to install the equipment by December 31, 1999, then the taxpayer would have to amend the reports or returns and pay additional tax and interest with respect to the credit previously claimed on the originally-filed reports or returns.

6We refer to calendar years 1992, 1993 and 1994 as the "base years." The base years are used to determine the base investment (county average new manufacturing machinery and equipment investment). For additional information see the discussion of "base investment" on page 4 of the Division's September 22, 1995 Information Release.

7The DEF Corporation had no presence in Ohio County C until late 1994 at which time it purchased new manufacturing machinery and equipment for use in Ohio County C.

8Even if DEF had invested in pass-through entities during the base year period, that information is irrelevant. The Department believes that what is relevant is the taxpayer's investment in the pass-through entity at the time the pass-through entity purchases the equipment during the second half of 1995 and each of the years 1996, 1997 and 1998 (see Example #2 beginning on page 10).

9Thus, the taxpayer is able to utilize the entire credit in the years the taxpayer is entitled to claim the credit and does not have any unused credit carryforwards.

10The Income Tax Audit Division will soon issue an information release discussing the alternative 20% credit. ORC section 5733.33(G) states that new equipment for which the taxpayer claims either the original 20% credit or the alternative 20% credit is not new equipment for purposes of the 7.5%/13.5% credit.

11See ORC section 5733.33(A)(5)(b) and the example beginning on the bottom of page 4 of the Income Tax Audit Division's September 22, 1995 information release.

12DEF Corporation's June 30 fiscal year end is irrelevant for purposes of computing the ORC section 5733.33 credit since the credit is based upon qualifying equipment purchased during the calendar year rather than during the taxpayer's fiscal year.

13ORC section 5733.33(C)(3) requires that a taxpayer separately determine the credit for each county for each of the four qualifying periods comprising the forty-two month period July 1, 1995 to December 31, 1998. For computational convenience we do not separately show the credit for each county since all of DEF Corporation's excess qualifying purchases are subject to only the 7.5% rate. However, if a taxpayer has some purchases during the year which qualify for the 7.5% rate and has other purchases during the same year which qualify for the 13.5% rate, then the taxpayer cannot add together all excess qualifying purchases but must separately compute (i) the total excess qualifying purchases eligible for the 7.5% rate and (ii) the total excess qualifying purchases eligible for the 13.5% rate.

14With respect to redetermining the remaining credit when the taxpayer sells or otherwise removes from the county or eligible area some -- but not all -- of its qualifying equipment, the Department requires that the taxpayer redetermine the remaining credit for the county or eligible area as if the taxpayer had never purchased the equipment which was prematurely sold or otherwise removed from the county or eligible area. This position is best illustrated by assuming that during 1998 the DEF Corporation sold only $26,000 -- rather than all $40,000 -- of its 1995 (second half) qualifying equipment for use in County A. The Ohio County A revised 1995 excess qualifying purchases would still be $-0-:

Revised cost of new manufacturing machinery and equipment purchased during the second half of 1995 for use in Ohio County A ($40,000 - $26,000)

$14,000

  
Less: Ohio County A base investment (from Part I, page 4)

<$15,000>

  
Ohio County A revised 1995 (second half) excess qualifying purchases

$ - 0 -

The Division rejects the argument that although DEF Corporation sold some of its 1995 (second half) equipment, the equipment which generated the credit was not among the equipment sold.

15See noncodified Section 5 of Am. Sub. S. B. No. 188, 121st General Assembly which states that the taxpayer cannot begin claiming the 7.5%,/13.5% credit until the 1997 report.

16Recall that except for the 1998 disposition of the 1995 Ohio County A qualifying property, at no time prior to January 1, 2003 does DEF dispose of any remaining qualifying property purchased during the second half of 1995, and at no time prior to the end of the six year period beginning on January 1 following the date of the purchase of post-1995 qualifying property does DEF dispose of any such property. For purposes of this credit, dispositions include moving the equipment out of the county or eligible area for which the credit was claimed.

17See Note #2 on page 5.

18Recall that in 1998 DEF did not purchase any new manufacturing machinery and equipment.

19Partnerships and other flow-through entities do not compute the credit but do file the notice of intent. See pages 8 and 9 of the Income Tax Audit Division's September 22, 1995 information release.

20The Division's position is that the credit is based upon DEF Corporation's ownership interest at the time the XYZ Partnership purchases the new manufacturing machinery and equipment during 1995 through 1998. Thus, DEF's interest in the XYZ Partnership during the seven year period in which DEF claims the credit is also irrelevant.

21Note that the $8,000 distributive share of the partnership base investment exceeds the $5,700 distributive share of the partnership's purchases by $2,300. This $2,300 difference, along with DEF's base investment of $15,000, will be subtracted from the $40,000 cost of DEF's own purchases of new manufacturing machinery and equipment. In fact, even if during a calendar year a partnership in which the taxpayer has invested does not purchase any new manufacturing machinery and equipment, the taxpayer's distributive share of the partnership's base investment must nevertheless be subtracted from the taxpayer's cost of new manufacturing machinery and equipment in deriving the taxpayer's excess qualifying purchases. Similarly, if during a calendar year a partnership in which the taxpayer has invested purchases new manufacturing machinery and equipment but the taxpayer itself does not purchase any new manufacturing machinery and equipment, both the taxpayer's distributive share of the partnership's base investment and the taxpayer's stand-alone base investment must be subtracted from the taxpayer's distributive share of the partnership's purchases of new manufacturing machinery and equipment in deriving the taxpayer's excess qualifying purchases. For an illustration of this scenario see footnote 23 on page 14.

22Recall that a taxpayer cannot begin claiming the 7.5%./13.5% credit until the 1997 report (see noncodified Section 5 of Am. Sub. S. B. No. 188, 121st General Assembly).

23Recall that during calendar year 1998 the DEF Corporation disposed of all the qualifying equipment that it purchased during 1995 (second half) for use in Ohio County A. As such, no credit with respect to DEF's 1995 (second half) purchases is available for any tax year following the date of the disposition. Set forth below is the computation of the post-1998 revised yearly credit attributable to 1995 (second half) purchases:

DEF's revised 1995 (second half) purchases for Ohio County A

$ -0-

DEF's distributive share of XYZ's 1995 (second half) purchases for Ohio County A (10% x $57,000)

$ 5,700

Less: DEF's stand-alone Ohio County A base investment (From Example #1, Part I, on page 4)

<$15,000>

Less: DEF's Distributive Share of XYZ's Ohio County A base investment (DEF's 10% interest in the XYZ's Partnership during the last six months of 1995 X $80,000)

<$ 8,000>

Ohio County A 1995 (second half) revised excess purchases

$ -0-

Ohio County B 1995 (second half) excess purchases (same as Example #1, Part I, on page 5)

$ 43,000

Ohio County C 1995 (second half) excess purchases (same as Example #1, Part I, on page 5)

$ 60,000

Total revised 1995 (second half) excess purchases
Credit rate
Yearly adjustment factor
Post-1998 revised yearly credit attributable to 1995 (second half) purchases

$103,000
x .075
      X 1/7
$   1,104

Note that even though the revised cost of DEF's own purchases is zero, DEF's base investment is used to calculate the excess purchases attributable to DEF's investment in the partnership. Since the sum of DEF's stand-alone base investment ($15,000) and DEF's distributive share of XYZ's base investment ($80,000 x 10% is $23,000, DEF could have claimed a credit for 1995 (second half) purchases only to the extent that DEF's distributive share of XYZ's 1995 (second half) purchases of new manufacturing machinery and equip-ment when added to DEF's own purchases exceeded $23,000.

24Recall that neither the DEF Corporation nor the partnership purchased any new manufacturing machinery and equipment during 1998.

25As set forth earlier in footnote 8 on page 3, what is relevant is the ownership interest at the time the pass-through entity purchases new manufacturing machinery and equipment that qualifies for the credit. Lee's ownership interest during the seven years in which Lee claims the credit is also not relevant.

26This summary assumes that there were no premature dispositions of qualifying purchases. See footnote 14 on page 6 and footnote 23 on page 14.

27Recall that an individual cannot begin claiming the 7.5%/13.5% credit until the 1996 return (see noncodified Section 5 of Am. Sub. S. B. No. 188, 121st General Assembly).

28Recall that neither Lee nor S Inc. purchased any new manufacturing machinery and equipment during 1998 for use in Ohio County E.

29For more information, see the third paragraph of page 10 of the Income Tax Audit Division's September 22, 1995 information release. Furthermore, we understand that legislation is being discussed which would change the results shown in examples #4 and #5.

7.5% - 13.5% Credit
Years In Which 1/7 Credit Amounts Are Claimed

FRANCHISE TAX

Calendar Year in which Qualifying Equipment is Purchased

Tax Years (report years) in which 1/7 Credit Amounts Are Claimed

TOTAL

1997 1998 1999 2000 2001 2002 2003 2004 2005
1995 1/7 1/7 1/7 1/7 1/7 1/7 1/7 7/7
1996 1/7 1/7 1/7 1/7 1/7 1/7 1/7 7/7
1997 1/7 1/7 1/7 1/7 1/7 1/7 1/7 7/7
1998 1/7 1/7 1/7 1/7 1/7 1/7 1/7 7/7

INDIVIDUAL INCOME TAX

Calendar Year in which Qualifying Equipment is Purchased

Tax Years in which 1/7 Credit Amounts Are Claimed

TOTAL

1996 1997 1998 1999 2000 2001 2002 2003 2004
1995 1/7 1/7 1/7 1/7 1/7 1/7 1/7     7/7
1996 1/7 1/7 1/7 1/7 1/7 1/7 1/7     7/7
1997   1/7 1/7 1/7 1/7 1/7 1/7 1/7   7/7
1998     1/7 1/7 1/7 1/7 1/7 1/7 1/7 7/7

Note: The taxpayer can claim the "1/7 credit" amount only if during the calendar year preceding the year during which the report or return is due the taxpayer neither sells the qualifying manufacturing machinery and equipment nor transfers the machinery and equipment out of the county or eligible area for which the taxpayer originally calculated the credit.