For Nebraska's LB 775 incentives, what counts toward the 'original cost' of qualified property I buy and install -- just the purchase price, or also freight, interest, and my own workers' installation labor?

Plain-English summary

Under Nebraska's Employment and Investment Growth Act (LB 775), a company earned incentives partly by hitting a required level of investment in qualified property, and the credit was computed on that investment. For property the taxpayer owns, the statute measures investment by its original cost. This ruling defines exactly which dollars count as "original cost."

The core holding: 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."

The facts: a taxpayer buys equipment and installs it in the project using its own employees, and it incurs interest on money borrowed to pay for the equipment, plus shipping and labor to prepare the equipment for use. The question is which of those expenditures are part of "original cost."

The Department ties the answer to federal capitalization. Section 77-4103(6) provides that for qualified property owned by the taxpayer, the value is the original cost of the property. Generally, the amounts a taxpayer spends getting equipment ready for use are part of the original cost basis under the Internal Revenue Code -- including the purchase price, transportation of the property, and interest expense incurred before the equipment is placed into service. If the taxpayer had bought the property already installed, or paid someone else to install it, the IRC cost would include that installation; and the IRC also requires capitalizing installation costs when the labor is provided by the taxpayer itself.

So the Department defines "original cost" as the amount required to be capitalized for depreciation or the investment credit under the IRC. Any expense -- including the taxpayer's own labor -- that is capitalized as part of the cost of the equipment is part of original cost. That figure is used both to determine whether the required investment level has been met and to compute the credit earned on investment.

(Note: the ruling prints the statute as "Section 77-103(6)"; the companion ruling 29-87-2, issued the same day, cites the same definition as Section 77-4103(6).)

What this means for you

A company buying and installing equipment for an LB 775 project

Don't count only the sticker price. Your qualifying investment is the full capitalized cost under the IRC -- purchase price, freight, pre-service interest, and installation, including installation performed by your own employees when that labor is capitalized. That larger base helps you reach the required investment level and increases the credit earned on investment.

Accountants tying the state number to the federal basis

The bright line is federal capitalization: if it goes into depreciable/investment-credit basis under the IRC, it is "original cost" here. Keep your capitalization workpapers, since the same figure drives both the investment-level test and the credit computation.

Common questions

Q: Is "original cost" just what I paid for the equipment?
A: No. It is the purchase price plus the additional placing-in-service costs actually capitalized under the Internal Revenue Code, such as transportation and pre-service interest.

Q: Does my own employees' installation labor count?
A: Yes, when the IRC requires that installation labor to be capitalized as part of the cost of the equipment.

Q: What is the original-cost figure used for?
A: Both to determine whether you met the required level of investment and to determine the amount of the credit earned on investment.

Q: Can I rely on this ruling today?
A: It is the Department's general policy and is "binding on the Nebraska Department of Revenue until amended," but the LB 775 program has evolved since 1987. Confirm current law and consult a Nebraska tax professional.

Citations and references

• Nebraska Revenue Ruling 29-87-1, "Economic Development Tax Incentives -- Original Cost" (Nebraska Department of Revenue, issued September 4, 1987; approved by State Tax Commissioner Donald S. Leuenberger).
• Neb. Rev. Stat. § 77-4103(6) (R.S.Supp., 1987) -- definition of "investment"; original cost of owned qualified property (printed in the ruling as "77-103(6)").
• Internal Revenue Code capitalization rules for depreciation and the investment credit, as applied by the ruling.
• Related ruling: Revenue Ruling 29-87-8 (Equipment Moved Into the State) uses this "original cost" definition to value owned property relocated into Nebraska.

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/rr298701_original_cost.pdf

Original ruling text

Revenue Ruling 29-87-]
Economic Development Tax Incentives

This guidance document is advisory in nature but is binding on the Nebraska Department
of Revenue (Department) until amended. A guidance document does not include internal
procedural documents that only affect the internal operations of the Department and does
not impose additional requirements or penalties on regulated parties or include
confidential information or rules and regulations made in accordance with the
Administrative Procedure Act. If you believe that this guidance document imposes
additional requirements or penalties on regulated parties, you may request a review of the
document.

This guidance document may change with updated information or added examples. The
Department recommends you do not print this document. Instead, sign up for the
subscription service at revenue.nebraska.gov to get updates on your topics of interest.

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 the original cost for the purposes of the
Employment and Investment Growth 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 77-103(6), R.S.Supp. 1987, provides in part that:

Investment .. . 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 or the amount of the
investment credit under the IRC. Any expense, including the labor of the taxpayer that is capitalized as a part of the
cost of the equipment, will be considered 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:

Donald S. Leuenberger
State Tax Commissioner

September 4, 1987