Directive CD-98-3 Subject:Credit for Investing in Machinery and EquipmentTax:Corporate Franchise and Income TaxesStatute:G.S. 105-129.9Issued By:Corporate, Excise, and Insurance Tax DivisionDate: November 20, 1998Number:CD-98-3 This Directive describes how a taxpayer is to compute the credit for investing in machinery and equipment under G.S. 105-129.9 when the taxpayer has made eligible investments in more than one enterprise tier in a year in which it has a net decrease in investments in at least one of the enterprise tiers. When this occurs, the taxpayer must prorate its net Statewide increase in investment among the enterprise tiers in which its investment increased. The example in this Directive gives step-by-step instructions on how to make this calculation. Credit for Investing in Machinery and Equipment G.S. 105-129.9 allows a taxpayer that has placed eligible machinery and equipment in service in this State during the taxable year to claim a credit equal to 7% of the excess of the eligible investment amount over the applicable threshold. The eligible investment amount is the lower of two numbers. The two numbers are (1) the cost of the machinery and equipment placed in service and (2) the amount by which the cost of the taxpayer's total Statewide machinery and equipment in service on the last day of the taxable year exceeds the cost of the taxpayer's total Statewide machinery and equipment in service on the last day of the base year. The base year is the year, of the preceding three years, in which the taxpayer had the most eligible machinery and equipment in service in this State. The applicable threshold is the amount set by statute for the enterprise tier in which the investment is made. The threshold for each tier is as follows: Enterprise Tier Threshold Tier One $ -0- Tier Two 100,000 Tier Three 200,000 Tier Four 500,000 Tier Five 1,000,000 Example At the end of its base year, Taxpayer ABC had $19 million of machinery and equipment in service in the State of North Carolina. During the year, ABC placed a total of $7 million of machinery and equipment in service Statewide and disposed of $2 million of machinery and equipment Statewide. At the end of the year, ABC had $24 million of machinery and equipment in service in the State of North Carolina. This amount represents a $5 million net increase in the machinery and equipment placed in service in North Carolina (eligible investment) over the base year. ABC's tax credit is $231,000, computed as follows: Step One: Compute Eligible Investment Amount Compute ABC's eligible investment amount based upon the eligible machinery and equipment in service in the entire State. In the example above, the total investment is $7 million, but because ABC disposed of $2 million of machinery and equipment in enterprise tier 2, the eligible investment amount for the entire State is $5 million. M & E M & E at at Tier Base Year + Investment - (Disposals) = Year-End Tier 5 7.0 Million 3.0 Million 10.0 Million Tier 4 2.0 Million 2.0 Million 4.0 Million Tier 3 5.0 Million 1.0 Million 6.0 Million Tier 2 3.0 Million (2.0) Million 1.0 Million Tier 1 2.0 Million 1.0 Million 3.0 Million Statewide Totals 19.0 Million + 7.0 Million - (2.0) Million = 24.0 Million |_____ 5.0 Million* _____| *Represents eligible investment amount in total for State (after base period computation) Step Two: Prorate Among Tiers To prorate the eligible investment to the appropriate tiers, multiply the eligible investment amount ($5 Million) computed in Step One by the ratio of the increase in investment for each tier that has increased to the total increase in investment for all tiers ($7 Million). The $5 Million total State eligible investment amount computed for ABC would be prorated as shown below: Tier Investment Increase For Tier Proration Prorated Eligible Investment Tier 5 3.0 Million 3.0 Million 3.0/7.0 x 5 Million 2,142,857 Tier 4 2.0 Million 2.0 Million 2.0/7.0 x 5 Million 1,428,571 Tier 3 3.0 Million 1.0 Million 1.0/7.0 x 5 Million 714,286 Tier 2 (2.0 Million) N/A N/A Tier 1 1.0 Million 1.0 Million 1.0/7.0 x 5 Million 714,286 Tier 5 3.0 Million 3.0 Million 3.0/7.0 x 5 Million 2,142,857 Total 5.0 Million 7.0 Million 5,000,000 Step Three: Subtract Tier Threshold Reduce the prorated amount of investment computed in Step Two by the statutory threshold for each tier investment as shown below, and multiply the result by 7%: Tier Prorated Eligible Investment Before Threshold Threshold Prorated Eligible Investment After Threshold Credit Rate Credit Tier 5 2,142,857 1,000,000 1,142,857 7% 80,000 Tier 4 1,428,571 500,000 928,571 7% 65,000 Tier 3 714,286 200,000 514,286 7% 36,000 Tier 2 N/A 100,000 0 7% 0 Tier 1 714,286 0 714,286 7% 50,000 Total Available Credit = $231,000 If you have any questions concerning this directive, you may call the Corporate Tax Division of the North Carolina Department of Revenue at 919-814-1163. You may also write to the Division at P.O. Box 871, Raleigh, N.C., 27602-0871.