California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 3 - Corporation Income Tax › Article 3 - Tax Credits › Section 23636-4 - Qualified Wages

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
Qualified Wages -- (See Regulation
						23636-0
						for Table of Contents.)
(a) In
					 General. For purposes of Regulations
					 23636-1
					 through 23636-9, inclusive, the term "qualified wages" shall mean that portion
					 of wages paid or incurred by the qualified taxpayer to qualified employees that
					 are direct labor costs, as used in Internal Revenue Code section
					 263 A and defined in the
					 regulations thereunder, included in inventory costs for property manufactured
					 in this state by the qualified taxpayer for ultimate use in a Joint Strike
					 Fighter. For this purpose, the term employee encompasses both full-time and
					 part-time employees but shall not include contract employees or independent
					 contractors referenced in Treasury Regulation section
					 263 A-1. Qualified wages shall
					 include wages for engineering, design, and testing activities to the extent
					 those wages are treated as direct labor costs capitalized to and included in
					 inventory costs for property manufactured in this state by the qualified
					 taxpayer for ultimate use in a Joint Strike Fighter under the same method of
					 allocation for California income or franchise tax purposes that the taxpayer
					 used for federal income tax purposes under the uniform capitalization
					 allocation rules specified in Treasury Regulation section
					 1.263 A-1 (as in effect on the
					 date Regulation 23636-4 is effective).
(1)
					 Direct labor costs shall include all elements of compensation, such as basic
					 compensation, overtime pay, vacation pay, holiday pay, sick leave pay (other
					 than payments pursuant to a wage continuation plan under Internal Revenue Code
					 section 105(d) as it
					 existed prior to its repeal in 1983), shift differential, payroll taxes, and
					 payments to a supplemental unemployment benefit plan, but shall not include any
					 indirect labor costs.
(2) Indirect
					 labor costs shall include that portion of qualified wages that are not direct
					 labor costs. Indirect labor costs include, but are not limited to, training
					 costs, officers' compensation, pension and other related costs, and employee
					 benefit expenses (including payments pursuant to a wage continuation plan under
					 Internal Revenue Code section
					 105(d) as it
					 existed prior to its repeal in 1983).
(3) In determining whether direct costs of
					 labor are properly included in inventory costs for property manufactured in
					 this state by the qualified taxpayer for ultimate use in a Joint Strike
					 Fighter, the qualified taxpayer shall be required to use the same method of
					 allocation for California income or franchise tax purposes that the taxpayer
					 used for federal income tax purposes under the uniform capitalization
					 allocation rules specified in Treasury Regulation section
					 1.263 A-1 (as in effect on the
					 date Regulation 23636-4 is effective).
EXAMPLE 1: A, a qualified taxpayer, manufactures aircraft
						navigational instruments in its plant in Lancaster. A's manufacturing facility
						employees 20 people that assemble the instrument components. Assume that all of
						A's employees' activities are allocable to property manufactured in this state
						by the qualified taxpayer designed for ultimate use in a Joint Strike Fighter.
						A pays its employees $20 per hour, plus the following amounts as an employer:
						Social Security $1.54; Unemployment Insurance $.18; Workers' Compensation
						Insurance $.60; Health and Life Insurance $2.08 and Retirement Benefits $1.68
						for total compensation of $26.08 per hour. Pursuant to Treasury Regulation
						section 263 A-1, the Workers' Compensation
						Insurance, Health and Life Insurance and Retirement Benefits amounts are
						classified as indirect labor costs and are not qualified wages. Accordingly,
						$21.72 of the total wages of $26.08 paid by A constitute direct labor costs and
						qualified wages for purposes of Revenue and Taxation Code section
						23636 and this regulation.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except
						A purchases pressurized sealing equipment for the navigational instruments and
						installs the equipment in B's manufacturing facility located in Burbank. A then
						enters into a contract with B to pressure seal all of A's navigational
						equipment following assembly by A. A pays B a specified hourly rate for sealing
						the equipment. B is properly classified as an independent contractor. Under
						these facts, even though the payments are made to operate equipment owned by A,
						the payments to B are not qualified wages as B is not an employee of A and the
						payments are not qualified wages eligible for the credit. However, if B is a
						qualified taxpayer and B meets all of the other requirements of Revenue and
						Taxation Code section
						23636 and this regulation, B would
						be able to claim the JSF Wage Credit for wages paid to its own employees, if
						any, in connection with the instrument sealing
						activity.