Home Table of Contents

§ 17053.37-4. Qualified Costs.

18 CA ADC § 17053.37-4Barclays Official California Code of Regulations

Barclays 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) (Refs & Annos)
Subchapter 2. Imposition of Tax
Article 1. Joint Strike Fighter Wage Credit
18 CCR § 17053.37-4
§ 17053.37-4. Qualified Costs.
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 263A. 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 179A, 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 263A 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 263A 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 263A 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.
(e) Qualified Costs Paid or Incurred Pursuant to Binding Contracts. For any qualified property constructed, reconstructed, or acquired by the qualified taxpayer (or any person related to the qualified taxpayer within the meaning of Internal Revenue Code sections 267 or 707) pursuant to a binding contract in existence on or prior to January 1, 2001, costs paid pursuant to that contract shall be subject to allocation under the rules in this subsection.
(1) Allocation of Costs Actually Paid Prior to January 1, 2001. In any case where a qualified taxpayer has actually paid amounts (including, without limitation, contractual deposits and option payments) prior to January 1, 2001, under a binding contract, any such amounts shall not be treated as qualified costs. However, if under any binding contract a qualified taxpayer has paid amounts both before and after January 1, 2001, then the amounts actually paid after December 31, 2000, to the extent properly allocable to the construction, reconstruction, or acquisition of qualified property, shall be treated as qualified costs. In the case of any contract that was binding on January 1, 2001, under the terms of which a qualified taxpayer will acquire both qualified property and non-qualified property, and the qualified taxpayer has actually paid amounts both before and after January 1, 2001, then the amounts paid prior to January 1, 2001, and the amounts paid after December 31, 2000, must be allocated between the qualified property and the non-qualified property in proportion to the actual amounts paid prior to January 1, 2001, and the total contract price.
(2) Binding Contract Bid Amount Reduced by Credit. In no event shall the allocation provided in this subsection be allowed unless the bid that was the basis of the binding contract in existence on or prior to January 1, 2001, was reduced by the amount of the JSF Property Credit allowable as required by Revenue and Taxation Code section 17053.37(i)(2) and Regulation 17053.37-7.
EXAMPLE 1: On October 1, 2000, M, a qualified taxpayer, executes a contract to purchase five machines and ten computers that are qualified property for a total of $100 (plus applicable California sales tax). M will use the qualified property to complete a subcontract where the bid amount was reduced by the amount of the JSF Property Credit allowable. Under the terms of the contract, M is required to make a non-refundable $20 deposit upon execution of the contract and pay the remaining $80 upon delivery of the machines and computers. On May 1, 2001, the machines and computers are delivered and M pays the remaining $80 due under the contract. Under these facts, the $20 actually paid by M in 2000 will not be treated as a qualified cost, but the remaining $80 paid in 2001 will be treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the computers are not qualified property because M intends to use them for general administrative purposes. The computers represent $20 of the total $100 contract price. Under these facts, since M is purchasing both qualified property and non-qualified property under a binding contract, the $20 paid prior to January 1, 2001, and the $80 paid after December 31, 2000, must be allocated between the machines and the computers. Since the cost of the machines represent 80% of the total contract price ($80/$100), and $20 was actually paid prior to January 1, 2001, $16 (80% of $20) of the total $80 paid for the machines is treated as having been paid prior to January 1, 2001, and is thus not treated as a qualified cost. However, the remaining $64 ($80-$16) paid for the machines is treated as a qualified cost.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that the qualified taxpayer did not reduce the amount of the bid that formed the basis of the subcontract by the amount of the JSF Property Credit allowable. Under these facts, M is not entitled to any credit since the bid amount was not reduced by the amount of the JSF Property Credit allowable.
(3) Binding Contracts. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, a contract shall be treated as binding where the contract is enforceable under state law against the qualified taxpayer (or any related party within the meaning of Internal Revenue Code sections 267 or 707) and the amount of potential damages (whether by an express liquidated damages provision or otherwise) for which the qualified taxpayer may be liable upon cancellation or breach of the contract would equal or exceed five percent (5%) of the total contract price. However, a contract to acquire a component part of a larger item of property shall only be treated as a binding contract to acquire such component part and shall not be treated as a binding contract to acquire the larger item of property under the general rule for binding contracts. For example, a written binding contract to acquire a motor to power a drill press would be a binding contract only for the motor, not for the entire drill press.
EXAMPLE 1: X, a qualified taxpayer, enters into a written contract with Y on August 15, 2000, under which X agrees to purchase 10 machines for $150 for delivery on December 1, 2001. Under the terms of the contract, X is required to make a non-refundable deposit of $10 upon execution of the contract. Under these facts, since X's potential damages upon cancellation or breach of the contract equal or exceed 5% of the total contract price ($10/$150, or 6.7%), X's contract with Y is treated as a binding contract in existence on or prior to January 1, 2001.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y is required to refund half of X's $10 deposit in the event X cancels the contract. Assume further that X's potential damages to Y upon breach of the contract are limited by a liquidated damages provision to the $5 of X's deposit that Y is not required to refund to X. Under these facts, X's contract is not treated as a binding contract in existence on or prior to January 1, 2001, since X's potential damages under the contract are less than 5% of the total contract price ($5/$150, or 3.3%).
(4) Successor or Replacement Contracts. Any contract entered into on or after January 1, 2001, that is a successor or replacement contract to a contract that was binding prior to January 1, 2001, shall be treated as a binding contract in existence prior to January 1, 2001, and shall be subject to the same rules described in this section applicable to binding contracts generally. However, if a successor or replacement contract is entered into on or after January 1, 2001, and the subject of the successor or replacement contract relates both to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property described in the original binding contract and to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property not described in the original binding contract, then the portion of those amounts described in the successor or replacement contract that were not described in the original binding contract shall not be treated as costs paid or incurred pursuant to a binding contract in existence prior to January 1, 2001.
EXAMPLE 1: On December 15, 2000, P, a qualified taxpayer, enters into a binding contract with Q to purchase three drill presses that are qualified property for a total contract price of $50. Under the terms of the contract, P makes a non-refundable $10 deposit to Q on December 20, 2000. On February 15, 2001, P and Q mutually agree to rescind the original contract and simultaneously execute a new contract under which P requests minor modifications to the specifications for the drill presses. Under the new contract, the total contract price is increased to $55 to compensate Q for Q's additional costs of modifying the specifications for the drill presses. Under these facts, the February 15, 2001, contract is treated as a replacement contract to the December 15, 2000, contract, and the $10 deposit made by P on December 20, 2000, is not treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that upon rescission of the original contract Q refunds P's $10 deposit. Under the terms of the new contract P is legally obligated to make a non-refundable deposit of $15 to Q within 30 days of the execution of the contract. Under these facts, the new contract is still treated as a replacement contract. Despite Q's refund to P, $10 of the total $15 deposit made by P under the new contract is properly treated as having been actually paid prior to January 1, 2001, and will not be treated as a qualified cost.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that under the new contract P agrees to purchase five drill presses instead of the three drill presses under the original contract. The total contract price for the new contract is increased to $85. Under these facts, the new contract is still treated as a replacement contract with respect to the three drill presses which were the subject of the original contract, and the $10 actually paid by P prior to January 1, 2001, is not treated as a qualified cost.
EXAMPLE 4: On November 1, 2000, R, a qualified taxpayer, enters into a binding contract with S to purchase two machines for $10 each and five computers for $2 each, for a total contract price of $30. Assume that the machines are qualified property, but since R will use the computers in its general administrative office, the computers are not qualified property. Under the terms of the contract, R makes a non-refundable $10 deposit to S on November 5, 2000. On March 1, 2001, R and S mutually agree to rescind the original contract and simultaneously execute a new contract under which R agrees to purchase three machines and five computers for $40. Under these facts, the March 1, 2001, contract is treated as a replacement contract to the November 1, 2000, contract to the extent of the two machines and the five computers, but is not treated as a replacement contract as to the third machine added by the March 1, 2001, contract. The $10 deposit actually paid prior to January 1, 2001, is not treated as a qualified cost. However, none of this $10 deposit amount is required to be allocated to the third machine for purposes of allocating the total contract price between the qualified property and the non-qualified property because the March 1, 2001, contract is not treated as a binding contract under this section as to the third machine, so that the entire $10 cost of the third machine is a qualified cost.
(5) Option Contracts. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, in any case where a qualified taxpayer (or any related party within the meaning of Internal Revenue Code sections 267 or 707) had an option to acquire qualified property on or prior to January 1, 2001, the option shall generally be treated as a binding contract. However, if the option holder would be required to forfeit an amount that is less than ten percent (10%) of the fixed option price upon cancellation or non-exercise of the option, then the option shall not be treated as a binding contract.
EXAMPLE 1: On May 1, 2000, F, a qualified taxpayer, pays $150 to G for the right to purchase G's aluminum die-casting equipment for a total contract price of $900 (including the amount paid for the option) at any time prior to May 1, 2002. Under the terms of the option, the $150 is not refundable in the event F does not exercise its option. On January 15, 2002, F exercises its option to purchase G's casting equipment and delivers the remaining $750 due to G under the terms of the option. Since the option holder would have been required to forfeit more than 10% of the fixed option price upon cancellation or non-exercise of the option ($150/900, or 17%), the option is treated as a binding contract and the $150 paid by F prior to January 1, 2001, is not treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that F pays only $80 for the option and is not obligated to forfeit any additional monies to G in the event F chooses not to exercise the option. Under these facts, the option is not treated as a binding contract since the maximum amount that F would be required to forfeit under the option contract is less than 10% of the fixed option price ($80/900, or 9%).
(6) Conditional Contracts. A contract shall be treated as binding notwithstanding the fact that the contract is subject to a condition.
EXAMPLE: On December 1, 2000, T, a qualified taxpayer, enters into a contract to purchase seven machines that are qualified property. The contract provides for a twenty percent (20%) down payment on December 1, 2000, with the balance to be paid on January 30, 2001. However, T's obligations under the contract are expressly conditioned upon the completion of T's new manufacturing facility in Palmdale. Despite this condition, the contract is treated as a binding contract in existence on or prior to January 1, 2001.

Credits

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
History
1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
This database is current through 6/28/24 Register 2024, No. 26.
Cal. Admin. Code tit. 18, § 17053.37-4, 18 CA ADC § 17053.37-4
End of Document