Replacement Tax Investment Credit Prior to January 1, 1994 (IITA 201(e))

Section 100 Section 100.2100  Replacement Tax Investment Credit Prior to January 1, 1994 (IITA 201(e)) a)         Scope of this Section.  Hereinafter, unless specifically provided  otherwise the  term "investment credit" refers to  the  credit  against  the Personal Property  Tax Replacement Income Tax provided by IITA  Section 201(e). b) A taxpayer shall be allowed  a 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, 1984 (IITA Section 201(e)(1)). 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.