For the Nebraska Advantage Act, what counts as the 'original cost' of equipment you buy and install -- and does your own installation labor count?

Plain-English summary

Under the Nebraska Advantage Act, a business's tax incentives are keyed to the size of its investment in qualified property. For property the business owns, that investment is measured by the property's original cost (Neb. Rev. Stat. § 77-5710). This ruling defines what "original cost" includes.

The rule: original cost = what the IRC makes you capitalize. "Original cost" means the amount required to be capitalized for depreciation under the Internal Revenue Code (IRC). In practice that is the purchase price plus the other costs of getting the equipment ready for use that are actually capitalized.

The ruling arose from a taxpayer buying equipment and installing it with its own employees, who had also incurred interest on money borrowed to pay for the equipment, shipping, and the labor to prepare it for use. The ruling walks through what counts:

• Included: purchase price; transportation of the property; interest expense incurred before the equipment is placed in service.
• Installation labor is included — even when your own employees do the installing. The IRC requires capitalizing installation costs whether you buy the property already installed, pay a third party to install it, or install it yourself.
• Section 179 write-offs count. Any amount capitalized as part of the equipment's cost, or written off under IRC section 179, is part of original cost.
• Excluded: any amount that is not capitalized or written off under section 179 is not part of original cost.

This original-cost figure does double duty: it's used to test whether the required investment level has been met and to determine the credit earned on investment.

What this means for you

Businesses tallying Advantage Act investment in owned equipment

Anchor "original cost" to your federal depreciation treatment. If the IRC makes you capitalize a cost (purchase price, freight, pre-service interest, installation — including your own crew's labor), it counts toward your Advantage Act investment; if a cost is expensed rather than capitalized or 179'd, it does not.

Businesses that self-install with in-house labor

Don't assume your own employees' installation work is "free" for investment purposes. Because the IRC requires capitalizing that installation labor, it is part of original cost and counts toward your investment and credit.

Common questions

Q: Does the interest on my equipment loan count?
A: Interest expense incurred before the equipment is placed into service is part of original cost.

Q: My own employees installed the equipment. Is that labor part of original cost?
A: Yes. The IRC requires capitalizing installation costs even when the taxpayer's own employees do the installing, so that labor is part of original cost.

Q: What about property I expensed under section 179?
A: Amounts written off under IRC section 179 are considered part of original cost. Amounts that are neither capitalized nor written off under section 179 are not.

Citations and references

• Neb. Rev. Stat. § 77-5710 -- "investment" means the value of qualified property incorporated into or used at the project; for qualified property owned by the taxpayer, the value is the original cost of the property.
• Internal Revenue Code (including section 179) -- supplies the capitalization standard that defines "original cost" for this purpose.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr290502_original_cost.pdf

Original ruling text

Revenue Ruling 29-05-2
Economic Development Tax Incentives
December 20, 2005
Economic Development Tax Incentives -- Original Cost. THE ORIGINAL COST OF QUALIFIED
PROPERTY INCLUDES THE PURCHASE PRICE AND THOSE ADDITIONAL COSTS
INCURRED IN PLACING THE PROPERTY INTO SERVICE THAT ARE ACTUALLY
CAPITALIZED UNDER THE INTERNAL REVENUE CODE.
Advice has been requested as to the expenditures that are part of “original cost” for the purposes
of the Nebraska Advantage Act.
The taxpayer is purchasing equipment and is installing the equipment in the project with its own
employees. The taxpayer has incurred interest expense on the money borrowed to pay for the
equipment, shipping, and labor to prepare the equipment for use.
Section 77-5710, R.S.Supp. 2005, provides in part that:
Investment means the value of qualified property incorporated into or used at the project. For
qualified property owned by the taxpayer, the value shall be the original cost of the property.
Generally the amounts spent by the taxpayer in getting equipment ready for use are part of the
original cost basis of the property under the Internal Revenue Code (IRC). This would include
items such as the purchase price, transportation of the property, and interest expense incurred
before the equipment is placed into service.
If the taxpayer had purchased the property installed, or the taxpayer had paid another party to
install the property, the cost of the property under the IRC would include the installation. The IRC
also requires the capitalization of the installation costs when the labor is provided by the taxpayer.
The term “original cost” shall mean the amount required to be capitalized for depreciation under
the IRC. Any amount, including the labor of the taxpayer, that is capitalized as a part of the cost
of the equipment or that is written off under section 179 of the IRC, will be considered part of
the original cost. Any amounts that are not capitalized or written off under section 179 are not a
part of the original cost. This amount shall be used in determining whether the required level of
investment has been met and also in determining the amount of the credit earned on investment.
APPROVED:

Mary Jane Egr
State Tax Commissioner
December 20, 2005

Nebraska Department of Revenue, PO Box 94818, Lincoln, Nebraska 68509-4818