Current through Register Vol. 48, No. 12, March 22, 2024
c) There
shall be allowed an additional credit equal to .5% of the basis of qualified
property placed in service during the taxable year provided such property is
placed in service on or after July 1, 1986, and the taxpayer's base employment
within Illinois has increased by 1% or more over the preceding year as
determined by the taxpayer's employment records filed with the Illinois
Department of Employment Security. If, in any year, the increase in base
employment over the preceding year is less than 1%, the additional credit shall
be limited to that percentage times a fraction, the numerator of which is .5%
and the denominator of which is 1%, but shall not exceed .5% (IITA Section
201(e)(1)).
1) Base employment. For purposes
of calculating the additional investment credit, base employment in Illinois is
defined as the average monthly total of individuals employed in Illinois by a
taxpayer during the taxable year. To calculate base employment for a particular
taxable year, the taxpayer need only total the number of individuals he
employed in Illinois during each month of the taxable year as reported to the
Illinois Department of Employment Security on Line 1 of Form UC-3/40 or
UI-3/40M and divide this total by the number of months in the taxable
year.
2) Example of the Additional
Investment Credit Computation. During the calendar year 1991, Corporation A
reported 500 employees each month on Line 1 of Form UC-3/40. Therefore,
Corporation A's base employment in Illinois for 1991 was 500 ((500 x 12)/12 =
500). In 1992, Corporation A reported 500 employees for each of the first six
months, and 505 employees for each of the remaining six months of the taxable
year. Therefore, Corporation A's base employment for 1992 was 502.5 ((500 x 6)
+ (505 x 6)/12 = 502.5). Corporation A's percentage of increase in 1992 base
employment over 1991 base employment is .5%. This figure is computed by
subtracting the 1991 base employment from the 1992 base employment and dividing
the remainder by the 1991 base employment ((502.5 - 500)/500 = .005 or .5%).
Corporation A will be allowed an additional investment credit for 1992 of .25%
(one-half the percentage of increase) times the adjusted basis of qualified
property placed in service in Illinois during the taxable year and on or after
July 1986.
d) The
investment credit is not allowed to the extent it would decrease the taxpayer's
replacement tax liability for the taxable year to less than zero, nor may any
credit for qualified property be allowed for any year other than the year in
which the property was placed in service in Illinois.
1) No carryback or carryforward of unused
credit is allowed for tax years ending prior to December 31, 1985.
2) For tax years ending on or after December
31, 1987, and on or before December 31, 1988, the credit shall be allowed for
the tax year in which the property is placed in service, or, if the amount of
the credit exceeds the tax liability for that year, whether it exceeds the
original liability or the liability as later amended, such excess may be
carried forward and applied to the tax liability of the 5 taxable years
following the excess credit years if the taxpayer:
A) makes investments which cause the creation
of a minimum of 2,000 full-time equivalent jobs in Illinois,
B) is located in an enterprise zone
established pursuant to the Illinois Enterprise Zone Act, and
C) is certified by the Department of Commerce
and Community Affairs as complying with the requirements specified in
subsections (d)(2)(A) and (B) above, by July 1, 1986 (IITA Section
203(e)(1)).
3) For tax
years ending after December 31, 1988, the credit shall be allowed for the tax
year in which the property is placed in service, or, if the amount of the
credit exceeds the tax liability for that year, whether it exceeds the original
liability or the liability as later amended, such excess may be carried forward
and applied to the tax liability of the 5 taxable years following the excess
credit year. The credit shall be applied to the earliest year for which there
is a liability. If there is credit from more than one tax year that is
available to offset a liability, earlier credit shall be applied
first.
e) Qualified
property. In order to qualify for the investment credit, property must be
tangible; depreciable pursuant to Internal Revenue Code Section 167, except
that "3-year property" as defined in IRC Section 168(c)(2)(A) is not eligible;
and acquired by purchase as defined in Internal Revenue Code Section 179(d).
IRC Section 168(c)(2)(A), as in effect at the time the credit was enacted,
defined "3-year property" to mean "section 1245 property: with a present class
life of 4 years or less; or used in connection with research and
experimentation." In addition to the above requirements, property must be used
in Illinois, by the taxpayer, in manufacturing, retailing, coal mining or
fluorite mining in order to qualify for the IITA Section 201(e) credit against
the replacement tax. Qualified property can be new or used; but cannot have
been previously used in Illinois, in such a manner and by such a person as
would qualify for the investment credit, or for the Section 201(f) Enterprise
Zone Investment Credit, and includes buildings and structural components
thereof.
1) Tangible property. Tangible
property can consist of personalty or realty and includes, but is not limited
to, buildings, component parts of buildings, machinery, equipment, and
vehicles. Certain property, though tangible in nature, does not qualify as
investment credit property because it is not depreciable.
2) Depreciable. In order to qualify for the
investment credit, property must also be depreciable pursuant to IRC Section
167. IRC Section 167 provides that depreciable property is property used in the
taxpayer's trade or business or held for the production of income which is
subject to wear and tear, exhaustion, or obsolescence.
A) Property which is depreciated under the
Modified Accelerated Cost Recovery System (MACRS) as provided by IRC Section
168, is considered depreciable pursuant to IRC Section 167 for purposes of the
investment credit. Property assigned to a MACRS class of less than 4 years does
not qualify for the investment credit.
B) Examples of tangible property which is not
depreciable are land, inventories or stock in trade, natural resources, and
coin or currency.
C) The provisions
of Treasury Reg. Section 1.167(a) -4 shall govern in determining whether
leasehold improvements are depreciable.
D) IRC Section 179 allows taxpayers, under
certain circumstances, to expense up to $10,000 of equipment purchased in a
single tax year. Based on this provision, if the total cost of the property was
$10,000 or less, the taxpayer has the option of expensing the cost all in one
year as a depreciation expense. While the property does have a useful life of
four or more years, since the election was made to completely expense the cost
of the property in one year, the property has no federal depreciable basis and
does not have a basis upon which to compute the Illinois investment tax credit.
Property not fully expensed under Section 179 would qualify for the credit
based on the cost of the depreciable property reduced by the Section 179
deduction.
3) Placed in
service. For purposes of the Illinois investment credit, "placed in service"
has the same meaning as under IRC Section 46. Property will be considered to
have been placed in service in the same taxable year in which it is taken into
account in determining the federal investment tax credit. See Treasury Reg.
Section 1.46 -3(d).
A) Even though property
is placed in service in the same taxable year in which it is taken into account
in determining the Federal investment tax credit only property placed in
service in Illinois after June 30, 1984 and before January 1, 1997 can qualify
for consideration in determining the credit against the replacement tax.
Qualifying property shall be considered placed in service in Illinois on the
date on which the property is placed in a condition or state of readiness and
availability for a specifically assigned function. See Treasury Reg. Section
1.46-3(d)(2).
B) Property which is
disposed of or which ceases to qualify for any other reason during the same
taxable year it was placed in service in Illinois will not be considered in
computing the investment credit for the taxable year.
4) Adjusted basis. The basis of qualified
property for purposes of the investment credit is the property's basis used to
compute the depreciation deduction for federal income tax purposes.
A) In computing the amount of investment
credit available for a taxable year, the proper investment credit rate will be
applied to the total basis of all qualified property placed in service in
Illinois during the taxable year, provided the property continues to qualify on
the last day of the taxable year.
B) If the basis of property placed in service
during a taxable year is increased or decreased during the same taxable year,
the increased or decreased basis will be used to compute the investment credit
for the taxable year.
5)
Acquired by purchase. In order to qualify for the investment credit, the
property must have been acquired by purchase as defined in IRC Section 179(d).
For purposes of determining whether property is acquired by purchase as defined
by IRC Section 179(d), the family of an individual includes only his spouse,
ancestors and lineal descendants. Also, for these purposes only, a controlled
group has the same meaning as in IRC Section 1563(a), except stock ownership of
only 50% or more is required. See Treasury Reg. Section 1.179 -4 under the
Internal Revenue Code. Property which the taxpayer constructs, reconstructs or
erects itself is generally considered acquired by purchase. IRC Section 179
defines purchase as any acquisition of property except:
A) an acquisition from a person whose
relationship to the acquiring person is such that a resulting loss would be
disallowed under IRC Section 267 or 707(b);
B) an acquisition by one component member of
a controlled group from another component member of the group; an acquisition
of property, if the basis of the property in the hands of the person acquiring
it is determined in whole or in part by its adjusted basis in the hands of the
person from whom the property was acquired; or
C) an acquisition of property, the basis of
which is determined under IRC Section 1014(a). IRC Section 1014(a) covers
property acquired from a decedent. Property acquired by bequest or demise is
not acquired by purchase.
6) Used in Illinois. Mobile property such as
vehicles must be used predominantly in Illinois. Removal of such property from
Illinois for a temporary and transitory purpose will not disqualify the
property so long as it continues to be used predominantly in the Illinois
operation of the taxpayer. For purposes of this Section, mobile property is
considered to be predominantly used in Illinois if usage in Illinois exceeds
usage outside of Illinois. Example. A retailer sometimes uses its trucks based
in Illinois to deliver goods both in Illinois and to out-of-State buyers. Such
temporary absence of its trucks from Illinois does not disqualify
them.
7) Manufacturing, retailing,
coal or fluorite mining. In general, in order to qualify for the investment
credit against the replacement tax, property must be used in Illinois by the
taxpayer exclusively in manufacturing operations, retailing, coal mining, or
fluorite mining. See subsection (d) of this regulation for the method of
apportioning the cost of a building or structural component thereof when a
portion of such building or structural component is used in a non-qualifying
operation. A lessor of otherwise qualifying property, which property is used by
the lessee in manufacturing, retailing, or coal or fluorite mining operations,
would not qualify for the credit because the property is not used "by the
taxpayer".
8) Manufacturing
operations. "Manufacturing operations" is defined in IITA Section 201(e)(3) as
the material staging and production of tangible personal property by procedures
commonly regarded as manufacturing, processing, fabrication or assembling which
changes some existing material into new shapes, new qualities, or new
combinations. It is not necessary that such procedures result in a finished
consumer product. Procedures commonly regarded as manufacturing, processing,
fabrication or assembling are those so regarded by the general public. The use
of otherwise qualifying property in any industrial, commercial or business
activity which may be distinguished from manufacturing, processing, fabrication
or assembling will not be considered a manufacturing operation for purposes of
the Section 201(e) credit. For example, a building constructed to house the
administrative services division of a manufacturing company would not be used
for manufacturing operations and would not qualify for the Section 201(e)
credit. By way of further example, otherwise qualifying property used in the
following operations will not qualify for the investment credit because the
activities described are generally not considered manufacturing operations:
A) Agricultural activities such as
cultivating the soil; raising or harvesting crops; the production of seed or
seedlings; and the development of hybrid seeds, plants, or shoots are not
manufacturing operations. The raising or breeding of livestock, poultry, fish
or any other animals, as well as commercial fishing or beekeeping is not
manufacturing.
B) Manufacturing
operations do not include mining; quarrying; logging; drilling for oil, gas or
water; or any other operations which result in the extraction or procurement of
a natural resource. However, the refining or processing of such natural
resources into a product of a different form or a product which has different
qualities is manufacturing.
C)
Persons engaged in the construction, reconstruction, alteration, remodeling, or
improvement of real estate are not considered engaged in manufacturing
operations.
D) Manufacturing
operations do not include research and development of new products or
production techniques.
E)
Manufacturing operations do not include the use of machinery or equipment in
managerial or other non-production, non-operational activities including
disposal of waste, scrap or residue, inventory control, production scheduling,
work routing, purchasing, receiving, accounting, fiscal management, general
communications, plant security, or personnel recruitment, selection or
training.
9) Retailing.
Retailing is defined as the sale of tangible personal property or services
rendered in conjunction with the sale of tangible consumer goods or commodities
(IITA Section 203(e)(3)). It is not required that such tangible personal
property be finished consumer goods, or that the property be sold to its
ultimate consumer. For example, sales of tangible personal property for resale
are included in the definition of retailing. Also included in the definition of
retailing for these purposes are any services rendered in conjunction with the
sale of tangible consumer goods or commodities such as uncrating, cleaning,
assembling, delivery or installation, provided such services are in conjunction
with a specific sale. For example, a delivery truck would qualify for the
Section 201(e) credit as it is used in conjunction with specific sales but a
company jet used by the president of the company for general or personal
purposes would not. Similarly, equipment used by the payroll division of a
company would not be used in a retailing operation or in a service rendered in
conjunction with the sale of tangible consumer goods. The following activities
are not considered retailing operations:
A)
The construction, reconstruction, alteration, remodeling, or improvement of
real estate;
B) The operation of a
hotel or motel or other institution providing only lodging
facilities;
C) Other service
professions which do not involve the transfer of tangible personal property
other than as an incident to the service performed. For guidance in
distinguishing service professions from retailing professions, the Department
will rely on rules promulgated under the Service Occupation Tax Act at 86 Ill.
Adm. Code 140;
D) Farming
operations related to crop and livestock production do not constitute
retailing. However, the marketing of such products would constitute a retailing
operation and otherwise qualifying property used in marketing farm produce
would qualify for the Section 201(h) credit.
10) Mining of coal or fluorite. Mining has
the same meaning as in Section 613(c) of the Internal Revenue Code, but shall
be limited to the mining of coal and fluorite (IITA Section 203(e)(3)). Mining
as defined in IRC Section 613(c) includes not only extraction, but also
treatment processes such as cleaning, breaking, sorting, sizing, dust allaying,
and loading for shipment.
11) New
or used. Qualifying property can be new or used; however, used property does
not qualify if it was previously used in Illinois in such a manner and by such
a person as would qualify for the Illinois investment credit.
A) Example: Corporation A purchases a used
pick-up truck, for use in its manufacturing business in Illinois, from an
Illinois resident who used the truck for personal purposes in Illinois. If the
truck meets all the other requirements for the investment credit it will not be
disqualified, merely, because it was previously used in Illinois for a purpose
which did not qualify for the credit. However, had Corporation A purchased the
used truck from an Illinois taxpayer in whose hands the truck qualified for the
investment credit, the truck would not be qualified property to Corporation A,
even though the party from whom the truck was acquired had never received an
investment credit for it.
B)
Property which would otherwise qualify for the credit will not be disqualified
because it was previously used in such a manner and by such a person as would
have qualified for the investment credit before the time such credit came into
effect. Example: In August of 1983, Corporation A purchased a drill press for
use in its manufacturing operation in an Illinois Enterprise Zone from
Corporation B. Corporation B originally placed the drill press into service in
its Illinois manufacturing operation in January of 1980, before the investment
credit came into effect. Even though Corporation B would have qualified for the
Illinois investment credit had there been a credit in 1980, this will not
disqualify Corporation A from claiming a credit for this property, provided the
property is otherwise qualified. However, should Corporation A sell the
property to Corporation C for use in its Illinois manufacturing operation, the
property would not qualify for the investment credit, even though it would
otherwise qualify. Because the property was used in such a manner and by such a
person as would have qualified for the investment credit at a time when at
least one of the credits was in effect. The fact that the credit was not yet
effective when Corporation A placed the property in service will not cause the
property to qualify for the credit in the hands of Corporation C because IITA
Section 201(e) specifically provides that the property is disqualified if it
previously qualified under either IITA Section 201(e) or 201(f).
f) Apportioning cost
when a building is used for both qualifying and non-qualifying operations. To
qualify for the Section 201(e) credit, property must be used exclusively in one
of the qualified operations, such as manufacturing, but the taxpayer need not
be exclusively engaged in such operations. Therefore, situations may arise
where a building or structure is used to house both qualifying and
non-qualifying operations. In such cases, the portion of the cost associated
with that part of the building used exclusively in manufacturing operations
would qualify for the credit, but not that part of the building, or any part of
a separate building, used for non-qualified operations. The cost of the
building can be apportioned by multiplying the cost of the building by a
fraction, the numerator of which is total square footage devoted to qualifying
operations and the denominator of which is total square footage.
g) Recapture. If within 48 months after being
placed in service, any property ceases to be qualified property in the hands of
the taxpayer or the situs of any qualified property is moved outside of
Illinois, or outside of the enterprise zone, for other than a temporary or
transitory purpose, then the personal property tax replacement income or the
income tax (whichever was reduced by the credit) for the taxable year in which
such event occurred will be increased.
1) Any
property disposed of by the taxpayer within 48 months of being placed in
service ceases to qualify. Also, any property converted to personal use ceases
to qualify. Any property used in other than manufacturing, retailing, coal
mining or fluorite mining ceases to qualify.
2) A taxpayer disposes of property when he
sells the property, exchanges or trades in worn-out property for new property,
abandons the property or retires it from use. Property destroyed by casualty,
stolen, or transferred as a gift is treated as having been disposed of.
Property which is mortgaged or used as security for a loan does not cease to
qualify provided the taxpayer continues to use the property in its business
within Illinois. Property transferred to a trustee in bankruptcy is considered
disposed of in the year the property is transferred to the trustee. A transfer
of property by foreclosure is treated as a disposition.
3) The reduction of the basis of qualified
property resulting from the redetermination of the purchase price is a
disposition of qualified property to the extent of such reduction in the
taxable year the reduction takes place. This occurs, for example, when property
is purchased and placed in service in one year, and in a later year the
taxpayer receives a refund of part of the original purchase price. See Treasury
Reg. Section 1.47 -2(c) under the Internal Revenue Code.
4) In order to determine the amount by which
the personal property tax replacement income tax or the income tax must be
increased in the taxable year in which the property ceased to qualify, was
moved outside of Illinois or the enterprise zone, the taxpayer must recompute
the investment credit for the taxable year in which the property was placed in
service by eliminating from his calculations any such property. This recomputed
investment credit is subtracted from the amount of credit actually used in the
year in which the disqualified property was placed in service. The difference
between the recomputed credit and the credit actually used is added to the
personal property tax replacement income tax or the income tax for the year in
which the property ceased to qualify or was moved outside of Illinois. If the
recomputed credit is greater than the credit actually used in the year the
property was placed in service, no addition to the current taxable year's
personal property tax replacement income tax or income tax is required.
EXAMPLE: In 1985, Corporation A places qualifying property
with a basis of $55,000 into service in an enterprise zone located in Illinois
and computes a Section 201(g) investment credit for the year of $275
($55,000.00 x .5%) and a Section 201(h) investment credit of $275 ($55,000 x
.5%). Corporation A's 1985 personal property tax replacement income tax is $260
and its income tax liability for the year is $420. After application of the
investment credit, Corporation A has no remaining replacement tax liability and
its remaining income tax liability is $145. In the following year, Corporation
A moved a qualifying asset having a basis in 1985 of $5,000 from Illinois and
is therefore required to recapture a portion of the investment credit applied
against its replacement tax. In order to determine its additional income tax
for 1986, Corporation A must recompute its 1985 investment credit by
eliminating the disqualified property ($55,000 - $5,000 x .5% = $250). This
recomputed credit is subtracted from the investment credit actually used in
1985 against the income tax ($260 - $250 = $10) and the difference is added to
Corporation A's 1986 income tax after application of the 1986 investment
credit.
