Current through September 18, 2024
A. A taxpayer shall be allowed an investment
tax credit computed in accordance with R.I. Gen. Laws §
44-31-1 against the business corporation tax or the personal income tax as imposed by
R.I. Gen. Laws Chapters 44-11 and 44-30, respectively, on tangible personal
property and other tangible property, including buildings and structural
components of buildings acquired, constructed, reconstructed or erected for use
principally by the taxpayer in the production of goods by manufacturing,
processing or assembling. The investment tax credit shall be allowed against
the business corporation tax computed on the basis of net income or net worth
apportioned to Rhode Island, provided, however, that an investment tax credit
will be allowed against the tax of only that corporation, included in a
consolidated state tax return, that qualifies for the credit and will not be
allowed against the tax of other corporations that may join in the filing of a
consolidated state tax return with such corporation.
B. The investment tax credit shall be allowed
on qualifying property acquired, constructed, reconstructed or erected after
December 31, 1973 and first placed in service in this state during a taxable
year beginning on or after July 1, 1974. A taxpayer placing otherwise
qualifying property in service during a taxable year beginning prior to July 1,
1974 shall not be allowed a credit in the year placed in service nor shall the
taxpayer be allowed a carryforward to any subsequent year.
C. In order to qualify for this credit, the
property must:
1. Be depreciable pursuant to
Internal Revenue Code,
26 U.S.C. §
167;
2. Have a useful life of 4 years or
more;
3. Be acquired by purchase as
defined in to Internal Revenue Code,
26 U.S.C. §
179(d);
4. Have a situs in this state at the date
first placed in service by the taxpayer; and
5. Be principally used by the taxpayer in the
production of goods by manufacturing, processing or assembling, as hereinafter
described.
D. For the
purpose of this regulation, the business of manufacturing, processing or
assembling, shall be divided into three parts as follows:
1. Administration, meaning all administrative
work such as general office operations, accounting, purchasing, collection,
sales promotion, clerical work in production such as preparation of work
records, production records and time records, and the transporting of raw
materials to the plant.
2.
Production, meaning all operations performed in producing or processing room,
shop or plant, including the production line starting with the handling and
storage of raw materials at the plant and continuing through the last step of
production where the product is finished, packaged for sale and stored.
Production shall also include machinery, equipment or other tangible property
which is principally used in the repair and service of other machinery,
equipment or other tangible property used principally in the production of
goods.
3. Distribution, meaning all
operations subsequent to production such as selling, displaying, loading and
transporting the manufactured products.
E. The investment tax credit does apply to
property used in the producing or processing room, shop, or plant if such
property is principally used in production as defined above. The investment tax
credit does not apply to property principally used in administration and
distribution as defined above.
F.
Section R.I. Gen. Laws §
44-31-1(b)
states:
1. ". manufacturing shall mean the
process of working raw materials into wares suitable for use or which gives new
shapes, new quality or new combinations to matter which already has gone
through some artificial process by the use of machinery, tools, appliances, and
other similar equipment. Property used in the production of goods shall include
machinery, equipment or other tangible property which is principally used in
the repair and service of other machinery, equipment or other tangible property
used principally in the production of goods and shall include all facilities
used in the production operation, including storage of materials to be used in
production and of the products that are produced."
2. Within the meaning of the preceding
paragraph a taxpayer is deemed to be a manufacturer within a city or town
within this state if it uses any premises, room or place therein primarily for
the purpose of transforming raw materials into a finished product for trade
through any or all of the following operations: adapting, altering, finishing,
making and ornamenting; provided, however, that public utilities, building and
construction contractors, warehousing operations, including distribution bases
or outlets of out-of-state manufacturers, fabricating processes incidental to
warehousing or distribution of raw materials such as alteration of stock for
the convenience of a customer, shall be excluded from this
definition.
3. A manufacturer is a
taxpayer whose principal business in this state consists of transforming raw
materials into a finished product for trade through any or all of the
operations described in the preceding paragraph. A taxpayer will be deemed to
be thus principally engaged if the gross receipts derived from such
manufacturing operations in this state during the taxable year amounted to more
than fifty percent (50%) of the total gross receipts derived from all the
taxpayer's business activities in this state during the same taxable year. For
the purpose of computing this percentage, gross receipts derived by a
manufacturer from the sale, lease or rental of finished products manufactured
by the taxpayer in Rhode Island should be deemed to have been from
manufacturing even though the taxpayer's store or other sales place in Rhode
Island may be at a different Rhode Island location from the Rhode Island
manufacturing plant.
4. The term
"manufacturer" shall also include taxpayers who are principally engaged in any
of the general activities respectively coded and listed as establishments
engaged in manufacturing in the Standard Industrial Classification Manual
prepared by the Technical Committee on Industrial Classification, Office of
Statistical Standards, Executive Office of the President, United States Bureau
of the Budget, as revised from time to time, but eliminating as manufacturers
those taxpayers, who, because of their limited type of manufacturing
activities, are classified in the manual as falling within a trade rather than
an industrial classification of manufacturers. Among those thus eliminated (and
accordingly also excluded as manufacturers within the meaning of this
subsection), are taxpayers primarily engaged in selling, to the general public
products produced on the same premises from which they are sold, such as
neighborhood bakeries, candy stores, ice cream parlors, shade shops and custom
tailors. However, a person who manufactures bakery products for sale primarily
for home delivery, or through one or more non-baking retail outlets (whether or
not the retail outlets are operated by the taxpayer) shall be a
manufacturer.
G. The
credit is 2% of the cost or other basis for federal tax purposes and is only
allowable in the year the property is first placed in service by the taxpayer
for the production of goods by manufacturing, processing or assembling
provided, however, that only the portion of expenditures that is properly
attributable to acquisition, construction, reconstruction or erection after
December 31, 1973 is taken into account, provided however the amount of credit
shall be 4% of the cost or other basis for federal tax purposes for
expenditures after December 31, 1993. If property is principally used in
manufacturing, processing or assembling and is partially rented or leased,
etc., the basis of the property must be adjusted for that proportionate share
of nonqualifying use. Property is considered first placed in service by the
taxpayer in the tax year in which under the taxpayer's depreciation practice,
the period for depreciation for the property begins or the year in which the
property is placed in a condition or state of readiness and availability for a
specifically assigned function, whichever is earlier. If, for the federal tax
purposes of the taxpayer, qualifying property has a useful life of a range of
three to five years, such property will be considered to have a useful life of
four years. The credit may not reduce the tax for any year to less than the
minimum tax. Any unused investment tax credit may be carried forward for seven
years.
H. "Principally used" means
used more than 50%. A building or addition is principally used in production
where more than 50% of its useable business floor space is used in storage and
production. Floor space used for bathrooms, cafeterias and lounges is not
useable business floor space. Floor space used for administration and
distribution is not used in production. Machinery is principally used in
production when it is used in production more than 50% of its normal operating
time.
1. EXAMPLE: ABC Corp., a calendar year
corporation, acquires a five story building, including structural components,
(each story of equal square footage) on 1/1/75, the basis of which is $100,000.
a. A Taxpayer rents or leases out three
floors and uses the remaining two floors in the production of goods by
manufacturing, processing or assembling. Since less than 50% of the building is
used in production, there is no investment tax credit allowed on any portion of
the building.
b. Taxpayer rents or
leases out two floors and uses the remaining three floors in the production of
goods by manufacturing, processing or assembling. Since more than 50% of the
building is used in production, there will be allowed an investment tax credit
on that portion of the building not leased.
c. Taxpayer uses three floors for production
and two floors for administration and distribution. Since more than 50% of the
building is used in production and none of the building is leased out, there
will be allowed an investment credit on the whole building.
I. A taxpayer shall not
be allowed a credit with respect to tangible personal property and other
tangible property, including buildings and structural components of buildings,
which it leases to any other person or corporation or leases from any other
person or corporation. For purposes of the preceding sentence, any contract or
agreement to lease or rent or for a license to use such property shall be
considered a lease, unless such contract or agreement is treated for federal
income tax purposes as an installment purchase rather than a lease. In order to
be considered the owner of the production property, a taxpayer must be allowed
federal depreciation on such property. Since property rented to others does not
qualify for credit, the credit shall not be allowed where the purchaser is not
the user of production property, even where the purchaser and the user may be
included in a consolidated federal and/or a consolidated state tax
return.
J. At the election of the
taxpayer, an investment credit may be allowed on otherwise qualifying property
in lieu of elective deductions on facilities qualifying as:
1. Air and water pollution control facilities
(R.I. Gen. Laws §§
44-11-11(a)
and
44-30-7);
2. Research and development
facilities (R.I. Gen. Laws §
44-32-1).
3. The election may be made even
though the qualifying property is not depreciable under the Internal Revenue
Code,
26 U.S.C. §
167 and is amortized under the
Internal Revenue Code.
26 U.S.C. §§
169 or 174.
4. Where amortization of air and water
pollution control facilities was deducted from apportioned net income or where
expenditures for research and development facilities were deducted from
allocated entire net income, an investment tax credit will not be allowed on
the same facilities.
K.
A recapture of a portion of the investment tax credit is required where
property on which a credit has been allowed is disposed or ceases to be in
qualified use except:
1. Where property was in
qualified use for its entire useful life, or
2. Where property was in qualified use for
more than twelve consecutive years.
L. Computation of the recapture.
1. Recapture = Tax credit taken on property
ceasing to qualify x (useful life of property in months - qualified use in
months) ÷ (useful life of property in months)
2. EXAMPLE: XYZ Corp., a calendar year
corporation, acquires a five story building, including structural components,
(each story of equal square footage) on January 1, 1975, and the building's
basis is $100,000. The building has a 20 year life. Taxpayer rents or leases
out one floor and uses the remaining four floors as three in production and one
in administration and distribution. Investment Tax Credit = 2% x ($100,000 -
$20,000) = $1,600.
a. On January 1, 1976
taxpayer rents another floor that it had previously been using in
administration and distribution. At that point taxpayer is renting two floors
and using the remaining three floors in production. Computation of the
recapture would be as follows:
|
R = $1,600 x 1/4 (240 months - 12 months) 240
months
R = $400 x 95%
R = $380
|
b.
On January 1, 1976 taxpayer rents two more floor used in production before. At
that point the taxpayer is renting three floors and using the remaining two
floors as one in production and one in administration and distribution. Since
the entire building is not used more than 50% in production, there is a
recapture of the entire remaining investment credit computed as follows:
|
R = $1,600 x 4/4 (240 months - 12 months) 240
months
R = $1,600 x 95%
R = $1,510
|
c.
On February 1, 1987 taxpayer converts the entire building to leased property.
Since the building was held more than twelve years, there is no recapture of
investment tax credit.
M. Where property is disposed of or ceased to
be in qualified use during the initial taxable year, the tax credit on that
property should be reduced by the recapture on that property.
N. Where property is disposed of or ceases to
be in qualified use during other than the initial taxable year, the taxpayer
may not reduce the amount of tax liability created by a recapture of investment
tax credits by investment tax credits allowed for the year in which the asset
is disposed of, nor can that liability be reduced by any carryovers of
investment tax credits to that year. The amount of recapture shall be added to
the taxpayer's tax in that year. The amount of recapture required to be added
to the tax in that year may not be offset or reduced by application of any
other credit otherwise available to the taxpayer for the same tax year. For
example, a taxpayer may not offset a recapture of investment credit by applying
daycare credits.
O. The following
rules apply to transactions between taxpayers:
1. A recapture of investment tax credit is
required unless all of the following elements are present in the transaction:
a. The property is transferred from one
taxpayer to another by a transaction in which the basis of the property in the
hands of the transferee is determined in whole or in part by reference to the
basis in the hands of the transferor, or a mere change in the form of the
taxpayer's business, and
b. the
acquiring taxpayer is taxable under R.I. Gen. Laws Chapters 44-11 or 44-30,
and
c. the property continues to be
in qualified use.
2. If
all of the preceding elements are present in the transaction, the transfer will
not require a recapture of investment tax credit and any unused investment tax
credit on the transferred property may be passed through to and carried forward
by the acquiring taxpayer.
3. If
the property in the hands of the acquiring taxpayer is not in qualified use for
its entire life or for more than twelve years, a recapture by the acquiring
taxpayer is required. In measuring the period of qualified use, the period
during which the property was held by the transferor taxpayer and the acquiring
taxpayer shall be taken into account.
4. The above rules do not strictly conform to
federal treatment. For example, a recapture is required where a transfer is
made other than to an acquiring taxpayer taxable under R.I. Gen. Laws Chapters
44-11 or 44-30 (on the theory that the property is no longer in qualified
use).
P. The following
are examples of incidents which require recapture:
1. A legal dissolution;
2. A trade-in;
3. Foreclosure of a security
interest;
4. Retirement before
expiration of its useful life.
5.
Destruction or damage by fire, storm or other casualty or by reason of its
theft or other involuntary conversion;
6. Where property is leased to
others;
7. Removal of property from
the state;
8. Cease to own
property;
9. Cease to otherwise be
in qualified use.
Q. In
order to qualify as property used in the production of goods, inventoriable
goods must be produced and the property must be used principally in the
production of such goods. Since the law includes property and equipment used to
store raw materials and finished goods in the definition of manufacturing,
property and equipment at the raw material warehouse and at the finished goods
warehouse would qualify provided that the property and equipment are
principally used in handling or storing the raw materials or finished goods.
Property used to transport raw materials to the raw materials warehouse or
finished goods to customers would not qualify. Property used for in-plant
handling of materials during the manufacturing process would qualify. Property
used for transporting materials between plants over public roads would not
qualify.
R. The investment tax
credit shall apply only in the taxable year in which the property is first
placed in service by the taxpayer. Acquisitions in a taxable year do not affect
similar property previously qualifying. For example, a manufacturer builds an
addition to a previously qualifying building for use as office space. The
investment in the addition will not qualify for the credit since it is not used
in production, but it will not trigger a recapture of the credit taken on the
previously existing plant. If the addition was built for use principally in
production, the credit would apply.
S. The term "taxpayer" as used in the
regulation shall mean and include, as appropriate, an individual, a
partnership, a corporation, or other taxable entity.
T. "Structural components" means such
separately attached parts of a building, as walls and built-in partitions,
permanent paneling and tiling, doors, stairways, the entire central heating,
plumbing, electrical, and air conditioning systems. Sink and toilet facilities,
sprinkler systems, fire escapes, elevators and escalators do not qualify. For
the purpose of this regulation, the building and all of its structural
components are treated as a whole when the building is acquired, constructed,
reconstructed or erected and first placed in service. The repairs, alterations,
improvements or replacement of a structural component subsequent to the
acquisition, construction, reconstruction or erection of the building will not
be allowed the credit.
U. For the
purpose of determining the basis of qualifying property, the carryover of
investment tax credit and of the recapture of the investment tax credit,
pertinent portions of the Internal Revenue Code and regulations thereunder,
including provisions applicable to corporations, Subchapter S corporations,
estates and trusts, and partnerships are deemed adopted to the extent not
inconsistent with this regulation and Rhode Island law.
