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.
.
The 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
Please note the
following:
- 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.
- 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).
- 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
- 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).
- 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.
- 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).
- 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:
- the Ohio counties in which the taxpayer will locate the
equipment.
- the taxpayer's base investment for each county in which
the taxpayer will locate the equipment.
- 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.
- 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).