California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 2.5 - Personal Income Tax (Taxable Years Beginning After 12-31-54) › Subchapter 2 - Imposition of Tax › Article 1 - Joint Strike Fighter Wage Credit › Section 17053.49-5 - Qualified Property

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(See Regulation Section
						17053.49-0
						for Table Contents.)
(a)
In
					 General.
For purposes of Regulations
					 17053.49-1
					 through
					 17053.49-11,
					 inclusive, the term "qualified property" includes tangible personal property,
					 whether new or used, that is defined in Internal Revenue Code Section
					 1245(a) (3) (A)
					 and is used by a qualified taxpayer in both an activity that is described in
					 Division D of the SIC Manual and primarily in a qualified activity. The term
					 "qualified property" also includes certain "off-the-shelf" computer software
					 that is used by a qualified taxpayer primarily in a qualified activity, any
					 special purpose building or foundation, or portion thereof, that is primarily
					 used by any qualified taxpayer in a qualified activity that is described in SIC
					 Codes 3571-3579, inclusive (computer and office equipment), SIC Codes
					 3671-3679, inclusive (electronic components and accessories), an activity
					 related to biotechnology described in SIC Code 8731 (commercial physical and
					 biological research), a biopharmaceutical activity described in SIC Codes
					 2833-2836, inclusive (drugs), those activities related to space vehicles and
					 parts described in SIC Codes 3761-3769, inclusive, those activities related to
					 space satellites and communications satellites and equipment described in SIC
					 Codes 3663 and 3812 (but only with respect to "qualified property" that is
					 placed in service on or after January 1, 1996), or those activities related to
					 semiconductor equipment manufacturing described in SIC Code 3559 (but only with
					 respect to "qualified property" that is placed in service on or after January
					 1, 1997), or property described in subsection (f) of this regulation. The term
					 "qualified property" does not include certain types of property described in
					 subsection (d) of this regulation. The basis of any qualified property for
					 which the MIC is claimed is not required to be reduced by the amount of any MIC
					 claimed.
(b)
General
					 Requirements for Qualified Property
. Except as provided in subsections
					 (c) or (f) of this regulation, in order for property to be treated as qualified
					 property, the property must satisfy each of the requirements of this subsection
					 of this regulation.
(1)
Tangible
					 Personal Property
. Except for any "off-the-shelf" computer software
					 upon which California sales or use tax has been paid and except for property
					 described in subsection (f) of this regulation, property must be tangible
					 personal property. For purposes of this section, the term "tangible personal
					 property" means any tangible property except land and improvements thereto,
					 such as buildings or other inherently permanent structures (including items
					 which are structural components of such buildings or structures). Tangible
					 personal property includes all property (other than structural components)
					 which is contained in or attached to a building. Thus, for example, production
					 machinery, printing presses, and testing equipment which is contained in or
					 attached to a building is tangible personal property. Furthermore, all property
					 which is in the nature of machinery (other than structural components of a
					 building or other inherently permanent structures) shall be considered tangible
					 personal property even though located outside a building. The determination of
					 whether property will be treated as an inherently permanent structure shall be
					 made under Internal Revenue Code Section
					 1245(a), so that
					 generally property will be treated as an inherently permanent structure (and
					 thus not tangible personal property) if the property is either intended to be
					 or is in fact affixed permanently, and is either incapable of being moved or,
					 if movable, would suffer a significant degree of damage upon its removal. Local
					 law, including state, county, city, or regional, shall not be controlling for
					 purposes of determining whether property is or is not "tangible" or "personal,"
					 so that the fact that under local law property is held to be personal property
					 or tangible property shall not affect the determination of whether such
					 property is tangible personal property for purposes of the MIC.
EXAMPLE 1
: B, a qualified taxpayer,
						manufactures heavy tractors in a manufacturing plant located in Tustin. B
						decides to upgrade its assembly line by installing a heavy duty overhead crane
						which will be permanently affixed to the building structure. Prior to
						installing the crane B constructs steel columns that extend from the crane's
						girder to the roof of the building. Under these facts, while the steel columns
						may be treated as "other tangible property" under Internal Revenue Code Section
						1245(a) (3) (B),
						the steel columns are not tangible personal property and thus not qualified
						property.
EXAMPLE 2
: Assume the same facts as in
						EXAMPLE 1, except instead consider the heavy duty overhead crane. The crane
						moves back and forth along the assembly line on craneway tracks that are
						permanently bolted to the building's ceiling beams and is hard-wired to the
						building's electrical system. Despite its permanent affixation to the building,
						the crane is an item of tangible personal property.
(2)
Section
					 1245(a)
					 Property.
Property must be defined in Internal Revenue Code Section
					 1245(a). However,
					 since property must also be tangible personal property under subsection (b)(1)
					 of this regulation, then, except for any "off-the-shelf" computer software upon
					 which California sales or use tax has been paid and except for property
					 described in subsection (f) of this regulation, only personal property
					 described in Internal Revenue Code Section
					 1245(a) (3) (A)
					 will be treated as qualified property for purposes of the MIC. Except as
					 provided in the previous sentence, other tangible property that is described in
					 Internal Revenue Code Sections
					 1245(a) (3) (B) through
					 (F) is not "personal" property and is thus
					 qualified property under Revenue and Taxation Code Section
					 17053.49.
EXAMPLE 1:
F, a qualified taxpayer,
						manufactures railroad cars. F constructs a building which is open at both ends
						through which a length of track travels to move the cars during several steps
						in the manufacturing process. Since the building is not tangible personal
						property defined in Internal Revenue Code Section
						1245(a) (3) (A),
						it would not be treated as qualified property.
EXAMPLE 2
: Assume the same facts as in
						EXAMPLE 1, but in addition, F constructs and installs machinery in the building
						to facilitate the assembly of the railroad cars. Although the machinery is
						permanently installed in the building, it is not a structural component of the
						building and can be removed without dismantling the building. As a result, the
						machinery is tangible personal property that is defined in Internal Revenue
						Code Section
						1245(a) (3)
						(A).
(3)
Used in an Activity Described in
					 Division D of the SIC Manual.
Property must be used in an activity
					 that is described in Division D of the SIC Manual. Generally, this requirement
					 will be satisfied if the taxpayer is using the property in the same activity
					 that made the taxpayer a qualified taxpayer under Regulation 17053.49-3. Thus,
					 for example, if a taxpayer that is engaged in manufacturing electromedical
					 equipment (SIC Code 3845) is treated as a qualified taxpayer under Regulation
					 17053.49-3), and the qualified taxpayer purchases tangible personal property
					 that is defined in Internal Revenue Code Section
					 1245(a)(3)(A) for
					 use in its electromedical equipment manufacturing activity, the requirement
					 that the property be used in an activity described in Division D of the SIC
					 Manual would be satisfied. In addition, in the case of a qualified taxpayer
					 that is engaged in two or more activities that are properly classified under
					 Division D of the SIC Manual, the use of property in any of such Division D
					 activities will satisfy this requirement that property be used in an activity
					 described in Division D of the SIC Manual.
(4)
Primarily Used in a Qualified
					 Activity.
Property must be primarily used in a qualified activity.
EXAMPLE 1:
B, a qualified taxpayer,
						manufactures trucks and automobiles in San Diego. B constructs a compressor for
						use in B's assembly line. The compressor is used for 500 hours in the assembly
						line, which is part of B's qualified activity, and for 250 hours in B's
						warehouse, which is part of B's non-qualified activity. Since B used the
						compressor in B's qualified activity for more than 50 percent of the time the
						compressor was actually in use during the 12-month period following the date
						the compressor was placed in service in California by B (500 hours/750 hours,
						or 66.7%), the compressor is primarily used in a qualified activity.
EXAMPLE 2:
Assume the same facts as in
						EXAMPLE 1, except B instead uses the compressor for 500 hours in the
						non-qualified activity and 250 hours in the qualified activity. Under these
						facts, the compressor is not primarily used in a qualified activity since the
						compressor was used less than 50 percent of the time during the 12-month period
						following the date the compressor was placed in service in California by B in a
						qualified activity (250 hours/750 hours, or 33.3%).
EXAMPLE 3
: Assume the same facts as in
						EXAMPLE 1, except B uses the compressor for a total of 100 days during the
						12-month period following the date the compressor was placed in service in
						California by B. During each of those 100 days, B uses the compressor for four
						hours in the qualified activity and six hours in the non-qualified activity.
						Although B is using the compressor in the qualified activity during each of the
						100 days that it is actually in operation, the compressor is not primarily used
						in a qualified activity because the total number of hours the compressor is
						used in a qualified activity is less than 50 percent of the total hours of
						operation of the compressor during the 12-month period following the date the
						compressor was placed in service in California by B.
EXAMPLE 4:
C, a qualified taxpayer,
						manufactures telephone equipment in San Jose. C purchases ten personal
						computers to be used in the company offices. The computers are to be used in
						part for administration and management, a non-qualified activity, but are also
						used for the tracking of assembly line operations by directly monitoring the
						performance, safety, and production of the assembly line, a qualified activity.
						As long as the computers are used at least 50 percent of the time in the
						qualified activity during the 12-month period following the date the compressor
						was placed in service in California by C, then C shall be treated as primarily
						using the computers in a qualified activity.
EXAMPLE 5:
R, a qualified taxpayer,
						manufactures light bulbs from raw materials such as glass, tungsten, aluminum,
						copper and paper. R initially receives the raw materials at its warehouse in
						North Hollywood, and then, when needed, transports them using its own trucks to
						R's manufacturing plant in Burbank. Upon delivery to the manufacturing plant,
						the raw materials are placed in a receiving area where they are then moved via
						forklift to their respective areas in the plant for introduction into the
						process of manufacturing the light bulbs. Under these facts, R's qualified
						property does not include the trucks used to transport the raw materials from
						the warehouse to the manufacturing plant since the raw materials have not been
						introduced into R's manufacturing "process" until the raw materials have been
						delivered to the manufacturing plant. However, the forklift would be qualified
						property since once the raw materials are received at the same premises where
						R's manufacturing activity is being conducted, the movement of the raw
						materials via forklift is treated as part of R's manufacturing process.
EXAMPLE 6:
Q, a qualified taxpayer, is
						an integrated oil producer that refines petroleum products. Q owns the wells
						from which the oil is extracted and, after extracting the oil from the ground,
						Q then pumps the oil, via pipeline, to its refinery located several miles from
						the well sites. The pipeline transverses other property for which Q has
						easements but does not own. Once the oil reaches the refinery, it is
						immediately introduced into Q's refining process. Q may not include as
						qualified property the oil wells or the pipelines because these are not used as
						part of the refining process.
EXAMPLE 7
: T, a qualified taxpayer,
						manufactures copper "romex" wire in Santa Ana. As part of T's manufacturing
						process, T purchases a machine to process the copper wire by coating it with
						white or black insulation prior to wrapping the wire in white plastic
						insulation. T's machine applies the materials and labor necessary to modify or
						change the characteristics of the copper wire. T's machine is used in
						"processing" the "romex" wire and thus would be qualified property.
EXAMPLE 8
: Assume the same facts as in
						EXAMPLE 7, except that T also uses the machine to coat its mailing labels for
						shipment of the wire. Assume that the processing of the copper "romex" wire is
						complete upon its being wrapped in the white plastic insulation, and that the
						number of hours the machine is used during the 12-month period following the
						date the machine was placed in service in California by T for the "processing"
						of the wire is less than 50 percent of the machine's total use during the
						period. Under these facts, the machine is no longer primarily used for
						"processing," a qualified activity, but is instead primarily used to coat the
						mailing labels, a non-qualified activity, so that the machine is not qualified
						property.
EXAMPLE 9
: C, a qualified taxpayer,
						manufactures cameras in Milpitas. The employees of C fabricate and assemble
						shelving to be used to store the manufactured cameras following completion of
						C's manufacturing process. Assume that the costs of fabricating the shelving,
						including the labor costs, are properly capitalized by C. Although C has
						"fabricated" the shelving, the shelving is not qualified property since it is
						not used in C's manufacturing process, which is a qualified activity, but is
						rather used for storage, which is a non-qualified activity.
EXAMPLE 10:
J, a qualified taxpayer,
						manufactures aquariums in Whittier. As part of J's manufacturing process, J
						uses specialized equipment which recycles used styrofoam packing material by
						converting it into plastic parts that J then uses in manufacturing the
						aquariums. The specialized recycling equipment is primarily used in recycling,
						a qualified activity, so that it is treated as qualified property.
EXAMPLE 11
: Assume the same facts as in
						EXAMPLE 10, except that J does not use postconsumer waste, but instead converts
						its own manufacturing waste (generated by the construction of plastic aquarium
						parts) into finished aquarium parts. J may include as qualified property the
						equipment used to convert the waste resulting from J's manufacturing process
						into the aquarium parts.
EXAMPLE 12:
V, a qualified taxpayer,
						manufactures explosives in Barstow. V's research team attempts through research
						and experimentation to create a new process for making explosives that can be
						more easily detected by standard metal detectors. Due to the high danger
						associated with testing and manufacturing the explosives, V constructs an
						explosion containment chamber to both conduct the research and to insert fuses
						into the explosives being manufactured by V. Assume that during the 12-month
						period following the date the explosion containment chamber was placed in
						service in California by V that it was used 60% of the time to conduct
						research, and 40% of the time to insert the fuses into the manufactured
						explosives. Assuming the explosion containment chamber is tangible personal
						property defined in Internal Revenue Code Section
						1245(a) (3) (A),
						and assuming V's research is described in Internal Revenue Code Section
						174 or the regulations thereunder,
						V may treat the explosion containment chamber as qualified property.
EXAMPLE 13:
W, a qualified taxpayer,
						manufactures engines for propeller airplanes in Long Beach. W constructs two
						engine test stands. The first engine test stand is used to evaluate design
						enhancements to the engines manufactured by W. Assuming this first engine test
						stand is tangible personal property that is defined in Internal Revenue Code
						Section 1245(a) (3) (A),
						and assuming W's research activity is described in Internal Revenue Code
						Section 174 or the regulations thereunder,
						W may treat the first engine test stand as qualified property because it is
						used in research and development. The second test stand is used to evaluate and
						test assembled engines prior to their shipment to customers. Assuming this
						second test stand is tangible personal property that is defined in Internal
						Revenue Code Section
						1245(a) (3) (A),
						W may treat the second engine test stand as qualified property because it is
						used as part of W's manufacturing process.
EXAMPLE 14:
X, a qualified taxpayer,
						manufactures garden and lawn fertilizer products in Arcata. One of the
						by-products of X's manufacturing process is a large volume of highly alkaline
						water. This water is considered waste water by the local water quality control
						agency that has jurisdiction over the discharge of waste water. To comply with
						the local waste water discharge standards, which are assumed for purposes of
						this example to exceed any applicable federal standards, X purchases equipment
						to reduce the alkalinity of the waste water so that it can be first reused in
						X's manufacturing process and then treated for discharge into local evaporative
						ponds. Since the waste water treatment equipment treats the waste water to meet
						or exceed the local agency's standards, X may include as qualified property the
						equipment purchased for treating the waste water since it is used in pollution
						control, a qualified activity.
EXAMPLE 15
: E, a qualified taxpayer,
						manufactures metal barrels and drums in Richmond. E purchases an electric
						welder which is qualified property and a portable diagnostic computer for
						regular and/or non-regular testing of the welder. E may include as qualified
						property the diagnostic computer since it is used primarily to maintain,
						repair, measure, or test the welder.
EXAMPLE 16:
F, a qualified taxpayer,
						manufactures aluminum die-casting equipment in Bakersfield. F purchases a laser
						micrometer measuring device to periodically check the alignment of extruders
						which are assumed to be qualified property. F may include as qualified property
						the laser micrometer measuring device since it is used primarily to measure the
						extruding equipment.
EXAMPLE 17:
G, a qualified taxpayer,
						manufactures motor vehicle parts in Van Nuys. G purchases a specialized wrench
						set to be used primarily for repair of G's specialized extruding press that is
						used by G in its manufacturing process. Since G uses the wrench set primarily
						on qualified property, G may include the wrench set as qualified
						property.
EXAMPLE 18:
H, a qualified taxpayer,
						manufactures elevators in Hayward. H purchases a standard electronic
						multi-tester. During the 12-month period following the date the electronic
						multi-tester was placed in service in California by H, the multi-tester is used
						30 percent of the time to test electrical equipment which is qualified
						property, and the remainder of the time H used the multi-tester to test the
						electrical system of its fleet of vehicles which are used by senior management
						personnel. Under these facts, assuming that the vehicles are not qualified
						property, H may not include as qualified property the multi-tester since it is
						not primarily used for the testing of qualified
						property.