How was qualified business facility investment calculated for the Kansas HPIP credit, especially for existing facilities and phased projects?

Plain-English summary

The Department explained how to calculate qualified business facility investment for the High Performance Incentive Program credit. K.S.A. 79-32,160a(e) provided a one-time credit equal to 10% of qualifying investment above $50,000.

K.S.A. 79-32,154(e) valued owned property at original cost and leased property at eight times net annual rent. The investment amount was the average of qualifying property values on the last business day of each calendar month in the taxpayer's tax year. A facility operating for less than the full year used only its full operating months.

Certification timing controlled eligibility. Only expenditures made during the certification or recertification period qualified, and the property also had to be available for use or actually used in the qualified facility during that period. Construction in progress was excluded under K.A.R. 92-12-85.

For an existing facility, the taxpayer began with qualifying months in its tax year that overlapped the certification period and then reduced the investment by the prior tax year's average investment in the facility.

Calendar-year taxpayers computed on a calendar year; fiscal-year taxpayers used their fiscal year. In a multiphase project, each separately usable section could enter the calculation as it came online without waiting for the whole project, but each separate HPIP credit claimed was reduced by the $50,000 threshold.

The Department recommended aligning the certification period with both the expenditure period and the time the property first became available for use.

What this means for you

HPIP-certified businesses

Coordinate certification dates, acquisition spending, and placed-in-use timing. Spending alone did not put property into the credit base.

Existing facilities

Compute the qualifying current-year monthly average and subtract the prior-year facility investment average described in the statute.

Multiphase projects

Track when each section becomes operational. A usable phase could qualify before project completion, but multiple credits each bore the threshold reduction.

Common questions

Q: What was the HPIP credit rate?
A: 10% of qualified business facility investment exceeding $50,000.

Q: When did property enter the calculation?
A: When it was available for use or actually used during the certification period.

Q: Did construction in progress qualify?
A: No. The letter said it was not included.

Q: Could a phased project claim before the entire facility was complete?
A: Yes. Separately usable sections could qualify as they came online.

Citations and references

• K.S.A. 2000 Supp. 79-32,160a(e) — HPIP credit rate, threshold, carryforward, and certification conditions
• K.S.A. 2000 Supp. 79-32,154(e) — qualified business facility investment valuation and monthly averaging
• K.A.R. 92-12-85 — construction-in-progress exclusion cited by the Department

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2001-022

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

October 3, 2001

XXXXXX
XXXXXX
XXXXXX
XXXXXX

Dear XXXXX:

This letter is in regards to our conversation regarding the calculation of the high performance incentive program (HPIP) investment tax credit.

K.S.A. 2000 Supp. 79-32,160a(e) provides,

“Notwithstanding the foregoing provisions of this section, any taxpayer qualified and certified under the provisions of K.S.A. 2000 Supp. 74-50,131, and amendments thereto; which, prior to making a commitment to invest in a qualified Kansas business, has filed a certificate of intent to invest in a qualified business facility in a form satisfactory to the secretary of commerce and housing; and that has received written approval from the secretary of commerce and housing for participation and has participated, during the tax year for which the exemption is claimed, in the Kansas industrial training, Kansas industrial retraining or the state of Kansas investments in lifelong learning program or is eligible for the tax credit established in K.S.A. 2000 Supp. 74-50,132, and amendments thereto, shall be entitled to a credit in an amount equal to 10% of that portion of the qualified business facility investment which exceeds $50,000 in lieu of the credit provided in subsection (b)(2) or (c)(2) without regard to the number of qualified business facility employees engaged or maintained in employment at the qualified business facility. The credit allowed by this subsection shall be a one-time credit. If the amount thereof exceeds the tax imposed by the Kansas income tax act on the taxpayer's Kansas taxable income or the premium tax or privilege fees imposed pursuant to K.S.A. 40-252, and amendments thereto, or the privilege tax as measured by net income of financial institutions imposed pursuant to chapter 79, article 11 of the Kansas Statutes Annotated for the taxable year, the amount thereof which exceeds such tax liability may be carried forward for credit in the succeeding taxable year or years until the total amount of the tax credit is used, except that no such tax credit shall be carried forward for deduction after the 10th taxable year succeeding the taxable year in which such credit initially was claimed and no carry forward shall be allowed for deduction in any succeeding taxable year unless the taxpayer continued to be qualified and was recertified for such succeeding taxable year pursuant to K.S.A. 2000 Supp. 74-50,131, and amendments thereto.”

In reading the authorizing statute for the HPIP investment tax credit, the calculation of the credit is tied directly to the definition of qualified business facility investment.

K.S.A. 2000 Supp. 79-32,154(e) provides the definition of qualified business facility investment as,

“the value of the real and tangible personal property, except inventory or property held for sale to customers in the ordinary course of the taxpayer's business, which constitutes the qualified business facility, or which is used by the taxpayer in the operation of the qualified business facility, during the taxable year for which the credit allowed by K.S.A. 79-32,153, and amendments thereto, is claimed. The value of such property during such taxable year shall be: (1) Its original cost if owned by the taxpayer; or (2) eight times the net annual rental rate, if leased by the taxpayer. The net annual rental rate shall be the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. The qualified business facility investment shall be determined by dividing by 12 the sum of the total value of such property on the last business day of each calendar month of the taxable year. If the qualified business facility is in operation for less than an entire taxable year, the qualified business facility investment shall be determined by dividing the sum of the total value of such property on the last business day of each full calendar month during the portion of such taxable year during which the qualified business facility was in operation by the number of full calendar months during such period. Notwithstanding the provisions of this subsection, for the purpose of computing the credit allowed by K.S.A. 79-32,153, and amendments thereto, in the case of an investment in a qualified business facility, which facility existed and was operated by the taxpayer or related taxpayer prior to such investment the amount of the taxpayer's qualified business facility investment in such facility shall be reduced by the average amount, computed as provided in this subsection, of the investment of the taxpayer or a related taxpayer in the facility for the taxable year preceding the taxable year in which the qualified business facility investment was made at the facility.”

When computing the investment tax credit for HPIP purposes many factors must be considered:
· What is the certification period of the qualified firm?
· What is the taxpayer’s tax year?
· When is the investment available for use or used by the taxpayer in the operation of the qualified business facility?

CERTIFICATION PERIOD
The certification period is important because only those expenditures made during the certification period will qualify for the credit and then only if those expenditures are capable of being used by the taxpayer or are in use by the taxpayer in the operation of the qualified business facility.

For a qualified business facility in operation for less than an entire taxable year, the computation of the qualified business facility investment shall begin with the first full month in which the investment is first available for use or is being used by the taxpayer, but only if this is during the certification period. If that investment is not available for use during the certification period, there will be no HPIP investment tax credit. In other words, the real and tangible property will not be in the computation of the investment tax credit until it is capable of being used by the taxpayer or is in use by the taxpayer in the operation of the qualified business facility. This property will also be present in the property factor for apportionment purposes.

In the case of an investment in a qualified business facility, which facility existed and was operated by the taxpayer prior to the investment, a taxpayer shall begin the computation of the qualified business facility investment with the first month in the taxpayer’s tax year in which the investment is first available for use or is being used by the taxpayer, but will only include in that computation of qualified business facility investment, the amount of investment as of the last business day of each calendar month during the certification (recertification) period for the taxable year. This investment is then reduced by the average amount of the investment of the taxpayer in the facility for the taxable year preceding the taxable year in which the qualified business facility investment was made at the facility.

TAX YEAR
The time period for computing qualified business facility investment is based on the taxpayer’s taxable year. If the taxpayer is on a calendar tax year then qualified business facility investment shall be computed on a calendar tax year. If the taxpayer is on a fiscal tax year then qualified business facility investment shall be computed on that fiscal tax year.

INVESTMENT AVAILABLE FOR USE
The real and tangible property will not be in the computation of the investment tax credit until it is capable of being used by the taxpayer or is in use by the taxpayer in the operation of the qualified business facility. This property will also be present in the property factor for apportionment purposes. K.A.R. 92-12-85 does not allow construction in progress (CIP) to be included in the property factor.

For purposes of the HPIP investment tax credit, qualified business facility investment shall include investment made during the HPIP certification (recertification) period. Therefore to maximize the benefit of the credit, a business making a large investment should try to establish its certification period to coincide with the timeframe during which expenditures are made and in which the investment is first available for use or is being used by the taxpayer.

In a multi-phase project spanning more than one twelve month period, where a facility is brought on line section by section, the Department does allow expenditures into the calculation of the investment tax credit for each separate section of a facility as that portion of the facility is brought on line or becomes usable by the taxpayer. Kansas does not require the entire project to be complete before claiming the HPIP investment credit as long as the investment consists of property used by the taxpayer in the operation of the business. However, if more than one HPIP investment tax credit is claimed by the taxpayer, the taxpayer must reduce each credit claimed, by the minimum amount of investment of $50,000.

If you should have any questions regarding the calculation of the HPIP investment tax credit, please do not hesitate to contact me at your earliest convenience.

Sincerely,

Kathleen M. Smith
Tax Specialist, Office of Policy and Research

Date Composed: 10/04/2001 Date Modified: 10/10/2001

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