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 17053.37-4 - Qualified Costs

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
Qualified Costs -- (See Regulation 17053.37-0 for Table
						of Contents.)
(a) In General. For
					 purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, the term
					 "qualified costs" includes any costs paid or incurred by a qualified taxpayer
					 for the construction, reconstruction, or acquisition of qualified property on
					 or after January 1, 2001, and before January 1, 2006, provided that California
					 sales or use tax has been paid, directly or indirectly, on such costs (except
					 for costs paid or incurred for capitalized labor), and such costs are properly
					 chargeable to the qualified taxpayer's capital account. However, the term
					 "qualified costs" does not include the amount of any California sales or use
					 tax paid, directly or indirectly, by the qualified taxpayer.
(b) California Sales and Use Tax Payment
					 Requirement. In order for costs to be treated as qualified costs, California
					 sales or use tax must be paid, directly or indirectly as a separately stated
					 contract amount or as determined from the books and records of the qualified
					 taxpayer, with respect to the qualified property. For purposes of Regulations
					 17053.37-1 through 17053.37-11, inclusive, the requirement that California
					 sales or use tax be paid prior to claiming the JSF Property Credit shall be
					 deemed satisfied as of the date the California sales or use tax is due and
					 payable under Part 1 (commencing with section
					 6001) of Division 2 of the Revenue
					 and Taxation Code. In the case of any costs paid or incurred by the qualified
					 taxpayer upon which California sales or use tax has not been paid (except in
					 the case of amounts properly treated as capitalized direct labor for the
					 construction, modification, or installation of qualified property), such
					 amounts shall not be treated as qualified costs. In the case of any leasing
					 transaction, Regulation 17053.37-6 contains special rules applicable to the
					 California sales and use tax payment requirement.
EXAMPLE 1: D, a qualified taxpayer, purchases three
						hydraulic turbines from B, a California manufacturer of hydraulic turbines, for
						$500 to be used in D's manufacturing facility in Escondido. Under the terms of
						the purchase contract, B agrees to install the turbines at D's manufacturing
						facility by affixing them to the facility's concrete floor for an additional
						$100. Assume $36 of the $100 installation charge constitutes direct labor costs
						paid by B to its employees under Internal Revenue Code section
						263 A. B charges and collects from
						D $40 in California sales tax under the contract ($500 X 8%), with the $100 in
						installation charges being separately stated in the purchase contract and for
						purposes of this example are assumed to be exempt from California sales and use
						tax. Under these facts, D has $536 in qualified costs ($500 in costs upon which
						California sales tax was paid and $36 in capitalized direct labor costs, but
						excluding the $40 in sales tax).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except
						that instead of D purchasing the turbines from B, D enters into a "fixed-price,
						turn-key" contract with C, the terms of which require D to pay C a total of
						$640 upon delivery and installation of the turbines in D's manufacturing
						facility. C, instead of delivering a resale certificate to B, pays $40 ($500 X
						8%) in California sales tax to B on its purchase of the turbines. Under C's
						contract with D, the $40 California sales tax paid by C is a separately stated
						item. Under these facts, since the sales tax was separately stated in D's
						contract with C and paid by C on behalf of D, D is treated as having satisfied
						the California sales tax payment requirement. However, since $40 of the total
						contract price represents the sales tax paid indirectly by D, the amount of D's
						qualified costs is $536 ($500 for the turbines plus $36 in capitalized direct
						labor costs, but excluding the $40 in sales tax).
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except
						that D's contract with C does not separately state the amount of California
						sales tax paid by C. However, D's books and records substantiate that C paid
						California sales tax on behalf of D and that the total contract price of $640
						is broken down between $500 for the turbines, $40 in California sales tax, and
						$100 in installation charges. Under these facts, the result is the same as in
						EXAMPLE 2 since the amount of California sales tax treated as being paid
						indirectly by D can be determined from D's books and records.
(c) Capitalization Requirement. In order for
					 costs to be treated as qualified costs, they must be amounts properly
					 chargeable to the capital account of the qualified taxpayer. Amounts shall be
					 treated as properly chargeable to capital account if under the qualified
					 taxpayer's method of tax accounting they are properly includible in the
					 qualified taxpayer's basis for computing depreciation on the qualified property
					 under Revenue and Taxation Code section
					 17250.
					 However, any amounts not required to be included in the qualified taxpayer's
					 basis for depreciation purposes shall not be treated as qualified costs. For
					 example, Internal Revenue Code section
					 179 provides that amounts for
					 which an election is made under that section to currently deduct such amounts
					 are "not chargeable to capital account." Thus, any amounts for which a
					 qualified taxpayer makes an election to currently expense for California income
					 or franchise tax purposes under either Internal Revenue Code sections
					 179 or
					 179 A, or amounts for which a
					 qualified taxpayer makes an election for California purposes to currently
					 expense under Internal Revenue Code section
					 179 -type provisions such as
					 Revenue and Taxation Code sections
					 17267.6
					 (Targeted Tax Area businesses), 17267.2 (Enterprise Zone businesses), or 17268
					 (Local Agency Military Base Recovery Area businesses), are treated as amounts
					 that are not properly chargeable to capital account. In addition, any costs
					 paid or incurred for property with a useful life of less than one year which
					 may properly be expensed under Internal Revenue Code section
					 162 would be treated as amounts
					 not properly chargeable to capital account. Although costs that are not
					 properly chargeable to capital account are not treated as qualified costs, the
					 portion of the cost of any item of qualified property that is properly
					 chargeable to capital account (such as, for example, the amount in excess of
					 what may be currently deducted under Internal Revenue Code section
					 179) may be a qualified cost under
					 Revenue and Taxation Code section
					 17053.37.
EXAMPLE 1: F, a qualified taxpayer, purchases 50
						stainless steel racks for $900 from G for use in F's production line in
						Palmdale. F pays $72 ($900 X 8%) in California sales tax on the purchase. F
						makes an election for California franchise tax purposes to currently expense
						the entire cost of the stainless steel racks under Revenue and Taxation Code
						section
						17255
						(Internal Revenue Code section
						179). Under these facts, the $900
						paid by F for the stainless steel racks would not be treated as a qualified
						cost since the $900 is not properly chargeable to F's capital account under
						Revenue and Taxation Code section
						17255
						(Internal Revenue Code section
						179).
EXAMPLE 2: H, a qualified taxpayer doing business in the
						Fresno Enterprise Zone, purchases a drill press for $25 from I, and pays $2 (8%
						of $25) in California sales tax on the purchase. H makes an election under
						Revenue and Taxation Code section
						24356.7
						to expense 40% of the cost of the drill press. Under these facts, $10 of the
						$25 paid by H would not be treated as a qualified cost since the $10 is not
						properly chargeable to H's capital account.
(d) Capitalized Labor Costs. For costs paid
					 or incurred by the qualified taxpayer for capitalized labor, the requirement
					 that California sales or use tax be paid in order for the costs to be treated
					 as qualified costs shall not apply. The qualified taxpayer shall have the
					 burden of establishing the amount of any cost paid or incurred for capitalized
					 labor that is a direct labor cost, as that term is used in Internal Revenue
					 Code section
					 263 A and defined in the
					 regulations thereunder, that can be identified or associated with and are
					 properly allocable to the construction, modification, or installation of any
					 item of qualified property. This burden may, for example, ordinarily be
					 satisfied by either an invoice, supported by the books and records of the
					 qualified taxpayer, that separately states the amount of capitalized direct
					 labor for qualified property acquired by purchase or, in the case of
					 self-constructed qualified property, from books and records of the qualified
					 taxpayer that establish the amount of capitalized direct labor for the
					 construction of the item of qualified property.
EXAMPLE 1: G, a qualified taxpayer, purchases a machine
						that is qualified property from X for $500. The price of the machine includes
						$50 in separately stated shipping charges. X collects California sales tax of
						$34 (8% of $450) from G, with the shipping charges assumed to be exempt from
						California sales and use tax. Upon receipt of the machine, G incurs an
						additional $50 in capitalized direct labor costs to have G's employees install
						the machine in G's manufacturing facility in Riverside, and $25 in training
						costs to train G's personnel to properly operate the machine. Under these
						facts, only the cost of the machine upon which California sales tax was paid
						($450), plus the capitalized direct labor installation costs ($50), would be
						treated as qualified costs. The $50 paid for shipping charges is not a
						qualified cost since no California sales tax was paid on such amounts, nor are
						the shipping charges treated as capitalized direct labor costs. The $25
						incurred by G in training costs is not a qualified cost since training costs
						are indirect labor costs under Revenue and Taxation Code section
						17053.37-
						2,
						subsection (a)(2).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except
						that the $50 in freight charges are not separately stated and X collects $40
						(8% of $500) in California sales tax from G. Under these facts, the cost of the
						machine, including the freight charges, upon which California sales tax was
						paid ($500), plus the capitalized direct labor installation costs ($50), would
						be treated as qualified costs.
EXAMPLE 3: J, a qualified taxpayer, purchases an extended
						warranty contract on qualified property. J's extended warranty contract
						provides that all unscheduled maintenance and repairs will be performed at no
						cost by the seller or its agent. Assume that the costs of the extended warranty
						contract are exempt from California sales and use tax. Under these facts, the
						extended warranty contract is not treated as a capitalized direct labor cost
						since it is not for the construction, modification, or installation of
						qualified property. As a result, the costs paid for the extended warranty
						contract are not qualified costs.
EXAMPLE 4: K, a qualified taxpayer, purchases a machine
						that is qualified property and then uses its own employees to install and
						modify the machine, including necessary adjustments, alignments and
						"debugging," so that the machine will properly run K's assembly line. Under
						these facts, assuming that K properly capitalizes for California tax purposes
						its direct labor costs for installing and modifying the machine, the labor
						costs are treated as capitalized direct labor costs and are thus qualified
						costs.
EXAMPLE 5: L, a qualified taxpayer, purchases a
						comprehensive insurance policy on an item of qualified property. L may not
						include the premiums for the insurance policy as qualified costs because the
						insurance policy covers risk of loss, and is not a capitalized direct labor
						cost that is associated with the construction, modification or installation of
						qualified property.
(1) Capitalized
					 Labor Costs Under Third-Party Contracts. Only capitalized direct labor costs,
					 as that term is used in Internal Revenue Code section
					 263 A and defined in the
					 regulations thereunder, that can be identified or associated with and are
					 properly allocable to the construction, modification, or installation of
					 specific items of qualified property, constitute qualified costs for purposes
					 of the JSF Property Credit. For capitalized labor costs paid or incurred by a
					 qualified taxpayer to a third-party contractor for the construction,
					 modification or installation of qualified property, a qualified taxpayer is
					 only allowed to include as qualified costs those direct labor costs that the
					 qualified taxpayer could include if the qualified taxpayer had itself
					 constructed the qualified property using its own employees. To determine
					 whether the labor costs can be included as capitalized direct labor costs for
					 the JSF Property Credit, the qualified taxpayer is required to look through its
					 contract with the third party and put itself in the shoes of the third party
					 for purposes of computing qualified costs.
EXAMPLE 1: H, a qualified taxpayer, contracts with I for
						$100 to have a machine that is qualified property modified to increase its
						per-unit output. Assume that the labor costs associated with the modification
						are exempt from California sales and use tax. Assume also that $45 of the $100
						contract constitutes direct labor costs paid by I to its employees under
						Internal Revenue Code section
						263 A and the regulations
						thereunder. Although H does not pay California sales or use tax on the
						modification work, H may include in its qualified costs a portion of the costs
						of modifying the machine since $45 of the $100 is properly treated as a
						capitalized direct labor cost for the modification of qualified property. H
						must "look-through" the contract with I so that only those costs that
						constitute capitalized direct labor costs with respect to payments made by I to
						its employees shall constitute direct labor costs with respect to
						H.