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 23637-5 - Qualified Property

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(Qualified Property -- See Regulation
						23637-0
						for Table of Contents.)
(a) In
					 General. For purposes of Regulations 23637-1 through 23637-11, 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 primarily in qualified activities to
					 manufacture a product for ultimate use in a Joint Strike Fighter. The term
					 "qualified property" does not include certain types of property described in
					 subsection (c) of this regulation. The basis of any qualified property for
					 which the JSF Property Credit is claimed is not required to be reduced by the
					 amount of any JSF Property Credit claimed.
(b) General Requirements for Qualified
					 Property. 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.
					 For purposes of this section, property must be tangible personal property. 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 are 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 JSF Property Credit.
EXAMPLE 1: B, a qualified taxpayer, manufactures aircraft
						engines 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 are 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)(3)(A)
					 Property. Only personal property described in Internal Revenue Code section
					 1245(a)(3)(A) is
					 treated as qualified property for purposes of the JSF Property Credit. Other
					 tangible property that is described in Internal Revenue Code section
					 1245(a)(3)(B) through
					 (F), is not "personal" property and is thus
					 not qualified property under Revenue and Taxation Code section
					 23637. EXAMPLE 1 F, a qualified
					 taxpayer, manufactures airplane fuselages. F constructs a building which is
					 open at both ends through which a length of track travels to move the fuselages
					 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 fuselages. 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 to Manufacture a Product for
					 Ultimate Use in a Joint Strike Fighter. Property must be used in qualified
					 activities to manufacture a product for ultimate use in a Joint Strike Fighter.
					 This requirement will be satisfied if the qualified taxpayer is using the
					 qualified property primarily to manufacture a product that is properly treated
					 as inventory of the qualified taxpayer and that is designed to be physically
					 installed in or attached to a Joint Strike Fighter aircraft. For this purpose,
					 the term "inventory" includes any property that is required to be included in
					 the qualified taxpayer's inventory under Internal Revenue Code section
					 263 A or that is described in
					 Internal Revenue Code section
					 1221(1).
EXAMPLE 1: B, a qualified taxpayer, manufactures aircraft
						radar antennas that are attached to a Joint Strike Fighter. B constructs a
						compressor for use in B's assembly line. B uses the compressor exclusively to
						manufacture the antennas. Since B uses the compressor to manufacture a product
						that is physically attached to a Joint Strike Fighter aircraft, the compressor
						is primarily used in a qualified activity.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except
						B manufactures ground based radar equipment to be used in connection with the
						Joint Strike Fighter program. Under these facts, even though the radar
						equipment is being manufactured in connection with the Joint Strike Fighter
						program, the compressor is not used in qualified activities since the
						compressor is used to manufacture a product that is not physically attached to
						a Joint Strike Fighter aircraft.
(4) Primarily Used in Qualified Activities.
					 Property must be primarily used in qualified activities.
EXAMPLE 1: B, a qualified taxpayer, manufactures avionics
						systems 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 activities, 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 activities
						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 aircraft
						communications 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 aircraft
						instrument lights 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 (assuming it was not used more than 50 percent of the time to unload
						the raw materials from the trucks to the receiving area) 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: T, a qualified taxpayer, manufactures copper
						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 wire and thus would be
						qualified property.
EXAMPLE 7: 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 wire is complete upon its being
						wrapped in the 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 such 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 8: C, a qualified taxpayer, manufactures
						hydraulic lines in Milpitas. The employees of C fabricate and assemble shelving
						to be used to store the manufactured lines following completion of C's
						manufacturing process. Assume that the costs of fabricating the shelving,
						including the direct 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 9: C, a qualified taxpayer, manufactures ground
						based radar equipment and radar equipment that is designed to be physically
						installed in or attached to a Joint Strike Fighter aircraft. C purchases a
						compressor to use on its assembly line. The compressor is used for a total of
						500 hours on the assembly line, 300 hours to manufacture the radar equipment
						that is designed to be physically installed in or attached to a Joint Strike
						Fighter aircraft and 200 hours to manufacture the ground based equipment. Since
						B used the compressor in B's qualified activities 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 (300
						hours/500 hours, or 60%), the compressor is primarily used in a qualified
						activity.
EXAMPLE 10: Assume the same facts as in EXAMPLE 10,
						except the compressor is used 200 hours to manufacture the radar equipment that
						is designed to be physically installed in or attached to a Joint Strike Fighter
						aircraft and 300 hours to manufacture the ground based equipment. Since B used
						the compressor in B's qualified activities for less 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 (200 hours/500
						hours, or 40%), the compressor is not primarily used in a qualified
						activity.