Information Release

Alternative 20% Credit - May 7, 1996

This information release explains the Department's interpretation of the new 20%. nonrefundable credit against the corporate franchise tax and the individual income tax applicable to manufacturers. This new credit was enacted by Substitute House Bill 343, 121st General Assembly (see Ohio Revised Code (ORC) sections 5733.311 and 5747.261). We refer to the credit as the "alternative 20% credit" because a taxpayer can claim it as an alternative to the original 20% credit provided by ORC section 5733.31 and section 5747.26. In addition, this information release (i) examines the relationship between the original 20% credit, the alternative 20% credit, and the 7.5% credit, (ii) corrects an error in our October 14, 1994 information release pertaining to the original 20% credit and (iii) adopts for all three credits a consistent interpretation of the term "purchase" as it relates to a lease that is treated as a purchase.

The alternative 20% credit and the original 20% credit are identical in most regards. Both credits require purchases of new manufacturing machinery and equipment during the designated period to equal or exceed a threshold amount which is determined as of the close of the taxpayer's most recent taxable year ending before January 1, 1995. The two credits differ only with respect to the designated purchase period and the threshold:

  • For the alternative 20% credit the designated period during which the new manufacturing machinery and equipment must be purchased is the seven-month period December 1, 1995 to June 30, 1996. (The designated purchase period for the original 20% credit is the eighteen-month period January 1, 1995 to June 30, 1996.)
        
  • For the alternative 20% credit the threshold is 20% of the cost of all manufacturing machinery and equipment located in the United States. (The threshold for the original credit is 20% of the cost of all tangible personal property located in the United States.)

Like the original 20% credit, the threshold for the alternative 20% credit must be satisfied on a consolidated basis with the taxpayer's component members. The alternative 20% credit is allowed only if the aggregate, cumulative cost of new manufacturing machinery and equipment purchased for locations in Ohio during the seven-month period by the taxpayer or by component members of the taxpayer's federal controlled group equals or exceeds 20% of the aggregate cost at the close of the taxpayer's most recent taxable year ending before January 1, 1995 of all manufacturing machinery and equipment located in the United States and owned by the taxpayer or component members of the taxpayer's federal controlled group.

If the threshold for the alternative 20% credit is satisfied, the taxpayer's credit equals 20% of the cost of all such new manufacturing machinery and equipment purchased for locations in Ohio during the seven-month period by the taxpayer. Like the original 20% credit, the alternative 20% credit is not limited to qualifying purchases that exceed the threshold; rather, if the threshold is met the credit applies to all qualifying equipment purchased during the designated period. So too, the maximum alternative 20% credit allowed to a taxpayer or to a controlled group of corporations of which the taxpayer is a component member is $500,000. For franchise taxpayers the alternative 20% credit first applies to tax year (report year) 1996 for purchases during the portion of the seven-month period included in the taxpayer's taxable year that ended in 1995. For individuals the credit first applies to taxable year 1995 for purchases made in December 1995.

As noted earlier, the alternative 20% credit is an alternative to the original 20% credit. A taxpayer that claims the original 20% credit may not claim the alternative 20% credit in any amount for any new manufacturing equipment even if the taxpayer did not claim the original 20% credit with respect to that new manufacturing equipment (see ORC sections 5733.311(B)(3), 5733.98(A)(6), 5747.26(B)(3) and 5747.98(A)(15)).

The new law also affects the 7.5% credit: new manufacturing machinery and equipment for which a taxpayer claims either the original 20% credit or the alternative 20% credit is not considered new manufacturing machinery and equipment for purposes of the 7.5% credit (see ORC section 5733.33(G) as amended by House Bill 343). Therefore, new manufacturing machinery and equipment for which the taxpayer claims either 20% credit: (1) is not eligible for the 7.5% credit and (2) is not considered when determining the amount by which the taxpayer's cost of new manufacturing equipment purchased during a qualifying period for use in an Ohio county exceeds the taxpayer's base investment for that county.Because of the overlap of purchase periods applicable to the three credits, a careful review of the interplay of the credits and the timing of purchases is necessary to maximize the available credits. Reference to our information releases on the original 20% credit dated October 14, 1994 and September 21, 1995 and our information release on the 7.5% credit dated September 22, 1995 together with the following time-line and examples will hopefully assist you in that review.

  • A taxpayer that otherwise qualifies for both the original 20% credit and the alternative 20% credit may claim either the original 20% credit or the alternative 20% credit, but not both.New manufacturing equipment for which a taxpayer claims a 20% credit is not considered new manufacturing equipment for purposes of the 7.5% credit.
  • A taxpayer must separately determine the 7.5% credit for qualifying equipment purchased during each period (P1 through P4) for each Ohio county and each eligible area.

.IllustrationThe time-line illustrates the purchase periods relevant to each of the three credits. Please observe that the purchase periods overlap and note the following dates:  

01/01/95 - the eighteen-month period applicable to the original 20% credit begins
07/01/95 - period P1 applicable to the 7.5% credit begins
12/01/95 - the seven-month period applicable to the alternative 20% credit begins
12/31/95 - period P1 applicable to the 7.5% credit ends
01/01/96 - period P2 applicable to the 7.5% credit begins
06/30/96 - the seven-month period applicable to the alternative 20% credit ends and the eighteen-month period applicable to the original 20% credit ends
12/31/96 - period P2 applicable to the 7.5% credit ends
01/01/97 - period P3 applicable to the 7.5% credit begins
12/31/97 - period P3 applicable to the 7.5% credit ends
01/01/98 - period P4 applicable to the 7.5% credit begins
12/31/98 - period P4 applicable to the 7.5% credit ends

Example I

Compute B's original 20 credit or alternative 20% credit in order to maximize the 20 credit. Assume the following facts:

  • B, Inc. is a manufacturer whose operations are entirely within Ohio.  B, Inc. is not a component member of a controlled group of corporations; nor is B a partner in a partnership.
  • B has a calendar year end.
  • B filed its 1996 franchise tax report on October 15, 1996, the extended due date of the report.
  • B's franchise tax for each of the tax years 1996 and 1997 after reduction for all credits allowed prior to the original 20% credit or the alternative 20% credit is greater than B's 20% credit. Thus, B is able to utilize its entire 20% credit in the tax year following the taxable year in which it purchased the equipment, and B does not have any unused credit carry forward. (See ORC section 5733.98 for the order in which a franchise taxpayer must claim its credits.)
       
  • As of December 31, 1994, the close of B's most recent taxable year that ended before January 1, 1995, the cost of all of B's tangible personal property located in the United States was $13,500,000, and the cost of all of B's manufacturing machinery and equipment located in the United States was $7,500,000.
      
  • For purposes of the original 20% credit B's threshold is $2,700,000 (20% of the $13,500,000 cost of all of B's tangible personal property located in the United States as of December 31, 1994, the close of B's most recent taxable year that ended before January 1, 1995).
      
  • For purposes of the alternative 20% credit B's threshold is $1,500,000 (20% of the $7,500,000 cost of all of B's manufacturing machinery and equipment located in the United States as of December 31, 1994, the close of B's most recent taxable year that ended before January 1, 1995).
      
  • B's thresholds (from above) and B's purchases of new manufacturing machinery and equipment for use in Ohio during the qualifying periods applicable to the two 20% credits are shown in the table on the following page.

New Manufacturing Machinery and Equipment Purchased for Use in Ohio

  

Cumulative Cost of Qualifying Equipment as of the End of the
Period for:
Period* Cost of Now Mfg.
M & E Purchased
During Period
Original 20%
Credit**
Alternative 20%
Credit***
01/01/95 - 06/30/95

$ 500,000

$ 500,000

Not Applicable
07/01/95 - 11/30/95

200,000

700,000

Not Applicable
12/01/95 - 12/31/95 100,000 800,000 $ 100,000
01/01/96 - 06/30/96 $2,100,000 $2,900,000 $2,200,000
      
Threshold for purposes of original 20% credit

$2,700,000

Threshold for purposes of alternative 20% credit

$1,500, 000

 

*The periods correspond to the dates in the time-line illustration on page 3. We show the purchases for each period so that we can determine not only the two 20 credits but also the 7.5% credit.   Later, in example II we examine B's 7.5% credit on B's purchases that exceed $2,500,000.

**The original 20 credit applies to new manufacturing machinery and equipment purchased during the eighteen-month period 01/01/95 to 06/30/96.

***The alternative 20 credit applies to new manufacturing machinery and equipment purchased during the seven-month period 12/01/95 to 06/30/96.

B satisfies the threshold requirements for both the original 20 credit and the alternative 20% credit. Specifically, B satisfies the threshold for the original 20% credit because B's $2,900,000 cumulative cost of new manufacturing machinery and equipment purchased for locations in Ohio during the eighteen-month period January 1, 1995 to June 30, 1996 exceeds B's $2,700,000 threshold (.2 X the $13,500,000 cost of all of B's tangible personal property located in the United States as of December 31, 1994). Similarly, B satisfies the threshold for the alternative 20% credit because B's $2,200,000 cumulative cost of new manufacturing machinery and equipment purchased for locations in Ohio during the seven-month period December 1, 1995 to June 30, 1996 exceeds B's $1,500,000 threshold (.2 X the $7,500,000 cost of all of B's manufacturing machinery and equipment located in the United States as of December 31, 1994). Although B satisfies the thresholds for both 20% credits, B may claim only one (see ORC sections 5733.311(B)(3) and 5733.98(A)(6)).

The maximum credit allowed for either the original 20% credit or the alternative 20% credit is $500,000. Thus, qualifying equipment on which either 20 credit may be claimed is limited to $2,500,000 ($2,500,000 X .2 = $500,000). Since B's purchases of qualifying equipment during the eighteen-month period applicable to the original 20% credit exceed the $2,500,000 ceiling but B's purchases of qualifying equipment during the seven-month period applicable to the alternative 20% credit are less than $2,500,000, B's original 20% credit will exceed B's alternative 20% credit. As such, in order to maximize its credit B should claim the original 20% credit.

Although the $800,000 cumulative cost of qualifying equipment purchased by B during taxable year 1995 does not equal or exceed B's $2,700,00 threshold, B may nevertheless claim a $160,000 original 20% credit on its 1996 franchise tax report because by October 15, 1996, the date that B filed its 1996 report, B had purchased additional qualifying equipment sufficient to satisfy the threshold. B may not claim the credit for equipment purchased during the period January 1, 1996 to June 30, 1996 on its 1996 franchise tax report because a taxpayer may not allocate the credit to a taxable year that ended before the purchase. (For further discussion of this point see the last "bullet" on page four of our October 14, 1994 information release.) If B claims a credit of $160,000 on its 1996 report, B's 1997 credit is limited to $340,000 ($500,00 - $160,000).

Assuming that B claims the original 20% credit of $500,000 on qualifying purchases of $2,500,000, B may not claim the alternative 20% credit in any amount because a taxpayer may claim only one of the two 20 credits. Furthermore, B may not claim the 7.5% credit (13.5% for eligible areas) on the $2,500,000 of new manufacturing machinery and equipment for which it claims the 20% credit because new manufacturing machinery and equipment for which the taxpayer claims either 20% credit is not considered new equipment for purposes of the 7.5% credit. However, B's $400,000 of purchases of new manufacturing machinery and equipment that exceed the $2,500,000 ceiling on which B claims the 20% credit can be considered for purposes of the 7.5% credit if B purchased the equipment during the forty-two month period July 1, 1995 to December 31, 1998. Example II, which follows, addresses B's 7.5% credit on the remaining $400,000 not eligible for the 20% credit.

Example II

Assume that B claims the original 20% credit in the amount of $500,000 on $2,500,000 of its $2,900,000 of new manufacturing equipment purchased during the period January 1, 1995 to June 30, 1996. Determine B's 7.5% credit on the remaining $400,000 so as to maximize the 7.5% credit. Assume that all of the facts in example I as well as the following additional facts apply:

  • B purchased the entire $2,900,000 of new manufacturing equipment for use in Delaware County.
       
  • For purposes of the 7.5% credit, B's base investment (county average new manufacturing machinery and equipment investment) for Delaware County is $310,000.
        
  • Delaware County is not an "eligible area" for either the period July 1, 1995 to December 31, 1995 or the 1996 calendar year ("P1 and "P2", respectively, in the illustration below). Thus, the Delaware County credit rate for equipment purchased during P1 and P2 is 7.5%.
      
  • During the period July 1, 1996 to December 31, 1996 B purchased no new manufacturing machinery and equipment for use in Delaware County.

The time-line illustrates the purchase periods for each of the three credits along with B's purchases during each period as stated on page 5.

Purchase Periods for original 20% Credit, Alternative
20% Credit, and 7.5% Credit and B's Purchases of
New Manufacturing Equipment

IllustrationPlease note the following:

  1. A taxpayer must separately determine the 7.5% credit for qualifying equipment purchased for use in each Ohio county and each eligible area during each of four separate qualifying periods: (i) the six month period July 1, 1995 to December 31, 1995 (ii) the 1996 calendar year, (iii) the 1997 calendar year, and (iv) the 1998 calendar year (P1 through P4 in the illustration). The 7.5% credit for each county for each qualifying period stands alone; purchases during one period for use in a county may not be combined with purchases during another period or for another county in order to qualify for the credit. On the other hand, the two 20% credits are determined statewide, not county-by-county and purchases are cumulative throughout the eighteen-month and seven-month periods.
      
  2. The period January 1, 1995 to June 30, 1995 is within the eighteen-month period applicable to the original 20% credit but is not in the forty-two month period applicable to the 7.5% credit. Thus, new manufacturing machinery and equipment purchased during the period January 1, 1995 to June 30, 1995 qualifies for the original 20% credit but does not qualify for the 7.5% credit (and also does not qualify for the alternative 2% credit).
      
  3. The period July 1, 1995 to June 30, 1996 is common to both the original 20% credit and the 7.5% credit. We refer to this period as the "overlap period."1 However, new manufacturing machinery and equipment purchased during the overlap period and for which the 20% credit is claimed is not considered new manufacturing machinery and equipment for purposes of the 7.5% credit and thus is not eligible for the 7.5% credit. Of course, if new manufacturing equipment is purchased during the overlap period and otherwise qualifies for both the 7.5% credit and the original 20% credit, a taxpayer will generally opt for the original 20% credit.2
      
  4. For purposes of the 7.5% credit the overlap period July 1, 1995 to June 30, 1996 is partially in P1 (July 1, 1995 to December 31, 1995) and partially in P2 (the 1996 calendar year).
      
  5. The period July 1, 1996 to December 31, 1996 is included in P2 (the 1996 calendar year) of the forty-two month period applicable to the 7.5% credit, but is not in the eighteen-month period applicable to the 20% credit.
      
  6. Because the 7.5% credit must be separately determined for each county for each of the four periods (P1 through P4) and because the base investment for a county is subtracted from the cost of qualifying equipment purchased during each period, a taxpayer will generally maximize its 7.5% credit by purchasing all of the qualifying equipment for a particular county during one of the four qualifying periods (rather than spreading those purchases out over two or more periods).
      
  7. If a taxpayer is eligible for the original 20% credit and if the taxpayer's purchases of qualifying equipment exceed $2,500,000 during the eighteen-month period, the taxpayer may choose the $2,500,000 of equipment on which it will claim the 20% credit from among all new manufacturing equipment purchased for use in Ohio during the eighteen-month period so as to maximize the 7.5% credit on the amount which exceeds $2,500,000. A taxpayer need not claim the 20% credit on the first $2,500,000 of equipment purchased during the eighteen-month period. Thus, the amount eligible for the 7.5% credit need not come from the last equipment purchased during the eighteen-month period. However, a taxpayer whose purchases of new manufacturing equipment exceed $2,500,000 during the eighteen-month period January 1, 1995 to June 30, 1996 must claim the 20% credit on equipment purchased during the period January 1, 1995 to June 30, 1995 if it wishes to maximize its combined 20% and 7.5% credits because equipment purchased during the period January 1, 1995 to June 30, 1995 is not eligible for the 7.5% credit.

In choosing the $2,500,000 of equipment for which it will claim the 20% credit, a taxpayer eliminates equipment that is eligible for the 7.5% credit and thus, in effect, determines the remaining equipment that can be considered for the 7.5% credit. In making its choice a taxpayer must consider the following:

  1. the Ohio counties in which the taxpayer will locate the equipment.
  2. the taxpayer's base investment for each county in which the taxpayer will locate the equipment.
  3. whether the counties in which the taxpayer will locate the equipment are eligible areas (or contain within their boundaries eligible areas) at the time of purchase.
  4. the periods during which the taxpayer purchased the equipment for use in each county.

Since B's $2,400,000 of purchases of new manufacturing equipment during the overlap period exceed $400,000 (the amount by which B's purchases exceed the $2,500,000 ceiling on which B claims the 20% credit) the entire $400,000 can be considered for purposes of determining eligibility for the 7.5% credit. As noted earlier, the overlap period is partially in P1 (July 1, 1995 to December 31, 1995) and partially in P2 (the 1996 calendar year), and the 7.5% credit must be separately determined for each county for new manufacturing equipment purchased in each period P1 through P4.

Because all of B's manufacturing operations are in Delaware County and B purchased all of the new manufacturing equipment for use in Delaware county, it is unnecessary to make a county-by-county analysis to determine which county will yield the maximum 7.5% credit on the remaining $400,000 eligible for the credit. However, because the 7.5% credit is computed for each county for each period, it is necessary to determine the period or periods in which the remaining $400,000 will generate the most credit. As noted earlier, a taxpayer will generally maximize its 7.5% credit for a particular county by making all of its purchases for that county within one of the four qualifying periods. Thus, in order for B to maximize the 7.5% credit on the $400,000 of eligible equipment, B should claim the credit entirely from purchases made in P1 (the period July 1, 1995 to December 31, 1995) or entirely from purchases made in the period January 1, 1996 to June 30, 1996 (included in P2). But, as shown in the table of purchases in example 1 and in the illustration on page 7, B purchased only $300,000 of new manufacturing machinery and equipment during P1, (which purchases consisted of $200,000 during the period July 1, 1995 to November 30, 1995 and $100,000 during the period December 1,1995 to December 31, 1995). As such, of the $400,000 of equipment eligible for the 7.5% credit no more than $300,000 could come from P1.  The remaining $100,000 of equipment eligible for the 7.5% credit would then come from the $2,100,000 of equipment purchased during the period January 1, 1996 to June 30, 1996 included in P2. However, if the $400,000 of eligible equipment consists of $300,000 from P1 and $100,000 from P2, the $400,000 of eligible equipment will generate no 7.5% credit because the credit is allowed only on the amount by which the cost of qualifying equipment purchased during each period for Delaware County exceeds B's Delaware County base investment of $310,000. Since the $300,000 and $100,000 amounts are less than the $310,000 base investment, there is no 7.5% credit.

On the other hand, if the $400,000 of new manufacturing machinery and equipment eligible for the 7.5% credit is claimed from purchases made during P2, B's 7.5% credit is $6,750 (.075 X (400,000 - 310,000)). B's combined credit on its $2,900,000 of new equipment is $506,750 consisting of a $500,000 original 20% credit and a $6,750 7.5%. credit.

In example II, above, B purchased the entire $2,900,000 of new manufacturing equipment for use in Delaware County. If, instead, B's manufacturing operations had been located in two Ohio counties and if half of the $2,900,000 of new equipment had been purchased for use in a county in which B has a high base investment and the other half of the new equipment had been purchased for use in a county in which B has a low base investment, in order to maximize its combined 20% and 7.5% credits B should claim the 20% credit on all equipment purchased for use in the county in which it has a high base investment so as to save the remaining $400,000 for the low base investment county in which the $400,000 will generate a larger 7.5% credit. All other things being equal, purchases of new equipment for a county in which the taxpayer has a low base investment will yield a larger credit than purchases for a county in which the taxpayer has a high base investment. However, as noted in example II, B must also consider the period in which it purchased the equipment for each county because the 7.5% credit is computed separately for each county for each period.

Similarly, if B's manufacturing operations were instead located in two Ohio counties in which its base investments were equal and if during the purchase periods only one of the counties had been an eligible area (subject to the 13.5% credit rate) B should claim the 20% credit on equipment purchased for use in the county that is not an eligible area so as to save the remaining $400,000 for the county that is an eligible area. All other things being equal, counties designated as eligible areas will yield a larger credit than counties not designated as eligible areas.

Example II and the above discussion illustrate that if a taxpayer claims the 20% credit and if the taxpayer's purchases of qualifying equipment exceed $2,500,000 during the eighteen-month period, the taxpayer must carefully choose the $2,500,000 of equipment on which it will claim the 20% credit in order to maximize its 7.5% credit on any amount that exceeds $2,500,000.

As we have previously noted, ORC 5733.33(G) provides that new manufacturing machinery and equipment for which a taxpayer claims a 20% credit is not considered new manufacturing machinery and equipment for purposes of the 7.5% credit. The Department of Taxation interprets this provision to mean that only the portion of the cost of a new machine for which a taxpayer claims a 20% credit is not considered new manufacturing machinery and equipment for purposes of the 7.5% credit, and that any remaining portion of the cost of that same new machine for which a taxpayer does not claim the 20% credit is new manufacturing equipment for purposes of the 7.5% credit. Thus, if new manufacturing machinery and equipment is purchased during the July 1, 1995 to June 30, 1996 overlap period during which both the 20% credit and the 7.5% credit apply, it is possible for a taxpayer to claim a 20% credit on a portion of the cost of a new machine and to claim a 7.5% credit on the remaining portion of the cost of that same machine. This situation will occur either when the cost of a single new machine exceeds the $2,500,000 ceiling on which a taxpayer can claim the 20% credit or when the cost of a new machine when added to the cost of other new machinery puts the taxpayer over the $2,500,000 ceiling.

Example III

D Corporation purchased for use at its Delaware County manufacturing plant a new press costing $3,100,000 on October 31, 1995 (note that the October 31, 1995 purchase date is in the overlap period applicable to both the original 20% credit and the 7.5% credit). D Corporation purchased no additional new manufacturing equipment during the period January 1, 1995 to June 30, 1996. For purposes of the original 20% credit D's threshold is $2,700,000, and for purposes of the 7.5% credit D's base investment for Delaware county is $350,000. D is not a component member of a controlled group of corporations, nor is D a partner in a partnership. D has a calendar year end.

Since the new press was purchased during the eighteen-month period January 1, 1995 to June 30, 1996 and since the cost of the new machine equals or exceeds D's 20% threshold D can claim the original 20% credit on the new machine. However, since the 20% credit is limited to $500,000, the aggregate, cumulative cost of new machinery on which D can claim the 20% credit is limited to $2,500,000 (2,500,000 X .2 = 500,000). Assuming that D claims a $500,000 original 20% credit on the new press, only the $2,500,000 portion of the cost of the press for which D claims the 20% credit is not considered new manufacturing machinery and equipment for purposes of the 7.5% credit. As such, the remaining $600,000 ($3,100,000 - $2,500,000) is considered new manufacturing machinery and equipment for purposes of the 7.5% credit. D's 7.5% credit for Delaware County for period P1 is determined as follows:

  

New manufacturing machinery and equipment purchased during period P1 for use in Delaware County
  

$3,100,000

Less: amount for which D claims the original 20% credit
  

< 2,500,000>

New manufacturing equipment for purposes of 7.5% credit
  

600,000

Less:  D's base investment for Delaware County
  

<  350, 000>

Amount eligible for 7.5% credit
  

$ 250,000

Credit rate
  

X .075

7.5% Credit amount

$ 18,750

D can claim the entire $500,000 original 20% credit on its 1996 franchise tax report if B's franchise tax for tax year 1996 after reduction for all credits allowed prior to the original 20% credit equals or exceeds $500,000. However, D can claim only 1/7 of the $18,750 7.5% credit in each of the seven tax years 1997 through 2003. (We assume here that D does not dispose of the press or move the press from Delaware County before January 1, 2003.)

CORRECTION

Page 4 of our October 14, 1994 information release pertaining to the original 20 credit should read as follows:

  • The term "controlled group" has the same meaning as in IRC section 179(d)(7). Generally, a controlled group of corporations is a group of two or more corporations connected through stock ownership of at-least MORE THAN 50% of the total combined voting power of all classes of stock.

*   *   *   *   *

LEASES THAT ARE TREATED AS PURCHASES

The Department's interpretation of the term "purchase" as it relates to a lease treated as a purchase was not consistent between our analysis of the original 20% credit and our analysis of the 7.5% credit. Our October 14, 1994 Information Release explaining the Department's interpretation of the original 20% credit stated, "If a lease is treated as a purchase under IRC section 179(d)(2) it is also treated as a purchase for purposes of the credit." However, our September 22, 1995 Information Release explaining the Department's interpretation of the 7.5% credit stated, "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 [7.5%] credit."

Because of the similarity of the two statutes with respect to the definition of "purchase" we now believe that the difference in the above interpretations is not justified and that our interpretation of the term "purchase" as it relates to a lease treated as a purchase should be consistent for all three new credits. Accordingly, the term "purchase" for purposes of the original 20% credit and the alternative 20% credit will be the same as the more liberal interpretation taken in our analysis of the 7.5% credit. That is, if a "lease" of qualifying equipment is considered a purchase of that equipment either for federal income tax purposes or under generally accepted accounting principles, then the lease is also considered a purchase for purposes of the original 20% credit, the alternative 20% credit and the 7.5% credit.

Consistency also requires similar treatment of leased property for purposes of determining the thresholds for the original and alternative 20% credits and for purposes of determining the base investment for the 7.5% credit. Thus, the following apply:

If a lease of tangible personal property is considered a purchase of that tangible personal property under either generally accepted accounting principles or the Internal Revenue Code and the lease was entered into prior to the close of the taxpayer's most recent taxable year ending before January 1, 1995, then that property must be considered for purposes of determining the threshold for the original 20% credit.

If a lease of manufacturing equipment is considered a purchase of that equipment under either generally accepted accounting principles or the Internal Revenue Code and the lease was entered into prior to the close of the taxpayer's most recent taxable year ending before January 1, 1995, then that manufacturing equipment must be considered for purposes of determining the threshold for the alternative 20% credit.

If a lease of new manufacturing equipment is considered a purchase of that equipment under either generally accepted accounting principles or the Internal Revenue Code and that lease was entered into during 1992, 1993 or 1994, then that manufacturing equipment must be considered for purposes of the 7.5% credit in determining the taxpayer's base investment in the Ohio county in which the taxpayer located the equipment._____________________________________1There is a similar overlap period with respect to the alternative 20% credit and the 7.5% credit. However, that overlap period is not relevant for purposes of this example because B does not claim the alternative 20% credit.

2However, if a taxpayer will not be able to utilize the entire 20% credit within the three year carry forward period, a taxpayer may instead choose to claim the 7.5% credit because that credit is claimed over seven years and in addition has a three year carry forward (see page 8 of our September 22, 1995 information release).