When a manufacturer computes whether a building is 'principally used' more than 50% for production and storage (to qualify for the investment tax credit), does unfinished, unused excess-capacity floor space count in the calculation?

Subject

Whether "usable business floor space," as defined in Business Corporation Franchise Tax Regulation § 5-2.4(c), includes space that is neither finished nor used, for purposes of qualifying a building for the investment tax credit.

Plain-English summary

Algorex Corporation moved into a new building for its fiscal year ended June 30, 1985, deliberately acquiring more space than it needed at the time. The excess "capacity space" was left unfinished — no heating, ventilation, air conditioning, plumbing, or electrical systems beyond what would support basic storage. Algorex wanted to know whether that empty, unfinished space had to be counted when computing the percentage used in the investment tax credit's "principally used" test for the building.

The credit requires that a building be "principally used" (more than 50%) in production — measured by a fraction: usable floor space used in production/storage of production materials and finished products, divided by total usable business floor space (excluding only bathrooms, cafeterias, and lounges from both sides of the fraction). The Department ruled that the unfinished excess-capacity space must be included in the denominator — the total usable floor space calculation — because the exclusion list is limited to bathrooms/cafeterias/lounges and doesn't carve out unfinished or currently-unused space. That space can also count in the numerator (production/storage use) if it is in fact being used to store production materials or finished products, even in its unfinished state — but not simply by virtue of sitting empty. If, for the fiscal year at issue, the resulting percentage comes out above 50%, the building qualifies for the credit that year (at the 6% rate in effect when the building was acquired); if it comes out 50% or below, the building doesn't qualify that year, but Algorex could still claim the credit in a later year if the space is converted into qualifying production or storage use and the recomputed percentage then exceeds 50%.

What this means for you

Manufacturers claiming the investment tax credit on buildings with excess capacity

Deliberately leaving expansion space unfinished and unused doesn't exclude it from the usable-business-floor-space denominator — it dilutes your production-use percentage and can push you below the 50% "principally used" threshold. If you want that space to count toward qualification, you need to actually use it for storing production materials or finished products, not just hold it in reserve.

Companies planning a phased buildout

If your building doesn't qualify in the year it's placed in service because excess space drags the percentage below 50%, you're not permanently locked out — converting that space to qualifying production or storage use in a later year and recomputing the percentage above 50% lets you claim the credit at the rate in effect when the building was originally acquired, constructed, or erected.

Accountants and tax professionals

Only bathrooms, cafeterias, and lounges are excluded from usable business floor space entirely (both numerator and denominator). Office, accounting, sales, and distribution space is included in the denominator but excluded from the numerator (it's usable business floor space, just not production use). Track excess-capacity space carefully — it stays in the denominator regardless of finish status, and only enters the numerator once actually storing production materials or output.

Common questions

Q: Does unfinished space automatically get excluded from the calculation?
A: No. Only bathrooms, cafeterias, and lounges are excluded from both the numerator and denominator — unfinished excess-capacity space stays in the denominator regardless of its finish status.

Q: Can unfinished space still count toward the production-use numerator?
A: Yes, if it's actually used to store materials for production or finished products, even without being finished out with HVAC/plumbing/electric beyond storage-level support.

Q: If a building doesn't qualify in its first year, is the credit lost forever?
A: No. If the space is later converted to qualifying production or storage use and the recomputed percentage exceeds 50%, the credit can still be claimed for that later year, at the rate in effect when the building was originally placed into service.

Q: Can another manufacturer rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented, and cannot be relied on by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 210.12 (investment tax credit, 6% rate for taxable years beginning before January 1, 1987)
• 20 NYCRR § 5-2.1 (investment tax credit claimed for the first taxable year property becomes qualified)
• 20 NYCRR § 5-2.2 (definition of "qualified property")
• 20 NYCRR § 5-2.4(c) ("principally used" test and usable business floor space computation)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a89_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89(7)C
Corporation Tax
May 17, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C881103B

On November 3, 1988, a Petition for Advisory Opinion was received from Algorex
Corporation, 70 Corporate Drive, Hauppauge, New York 11788.
The issue raised, is whether, for purposes of qualifying for the investment tax credit, "usable
business floor space", as defined in Business Corporation Franchise Tax Regulation section 5-2.4(c),
includes space that is neither finished nor used. Usable business floor space is the basis for
determining the denominator and numerator of the fraction used in computing the percentage of
"principal use" of a building.
Petitioner moved its operations into a new building during the fiscal year ended June 30,
1985. Petitioner acquired a larger space than was necessary at the time. This excess capacity space
has not been finished. There are no heating, ventilating, air conditioning, plumbing or electric
systems to support anything other than storage function.
For taxable years beginning prior to January 1, 1987, section 210.12 of the Tax Law allows
an investment tax credit against the tax imposed under Article 9-A of the Tax Law equal to six
percent of the cost or other basis for federal income tax purposes of qualified tangible personal
property and other tangible property, including buildings and structural components of buildings.
Section 5-2.1 of the Business Corporation Franchise Tax Regulations (hereinafter
"Regulations") provides that the taxpayer must claim the investment tax credit for the first taxable
year in which the property becomes qualified property.
Section 5-2.2 of the Regulations provides that the term "qualified property" means tangible
personal property and other tangible property, including buildings and structural components of
building, which:
(1)

are acquired, constructed, reconstructed or erected after June 30, 1982;

(2)

are depreciable pursuant to section 167 of the Internal Revenue Code or recovery
property with respect to which a deduction is allowable under section 168 of the
Internal Revenue Code;

(3)

have a useful life of four years or more;

(4)

are acquired by purchase as defined in section 179(d) of the Internal Revenue Code;

TP-9 (9/88)

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TSB-A-89(7)C
Corporation Tax
May 17, 1989
(5)

have a situs in New York State; and

(6)

are principally used by the taxpayer in the production of goods by manufacturing,
processing, assembling, refining, mining, extracting, farming, agriculture,
horticulture, floriculture, viticulture, or commercial fishing.

Section 5-2.4 of the Regulations provides that property used in the production of goods
includes all facilities used in the production operation, including the storage of material to be used
in production and the products that are produced.
Section 5-2.4 of the Regulations also provides that property is "principally used" in an
activity if more than 50% of its use is in such activity. A building or addition to a building is
principally used in production where more than 50 percent of its usable business floor space is used
in storage and production. Floor space used for bathrooms, cafeterias and lounges is not usable
business floor space. Space used for offices, accounting, sales and distribution is not used in
production.
When determining whether a building is principally used more than 50 percent for storage
and production, the percentage of usable business floor space used in storage and production is
computed. The percentage is computed by a fraction the numerator of which is usable business floor
space used in production and in the storage of materials to be used in production and the products
that are produced. The denominator of the fraction is total usable business floor space. When
computing usable business floor space, the entire building must be considered. However, an
exclusion, from both the numerator and denominator of the fraction, is allowed for floor space used
for bathrooms, cafeterias and lounges. The floor space that is used for offices, accounting, sales and
distribution is usable business floor space that must be included in the denominator of the fraction
but is excluded from the numerator because such floor space is not used in production.
Herein, when computing the percentage of usable business floor space used in storage and
production, Petitioner must include in the denominator the floor space Petitioner defines as "excess
capacity space" that has not been finished and which can only support a storage function. Such space
may be included in the numerator, if it is used for the storage of material to be used in production
or the storage of the products that are produced. The floor space that is used for bathrooms, cafeterias
and lounges should be excluded from both the numerator and denominator.
If the resulting percentage, computed for fiscal year ended June 30, 1985 is more than 50
percent, the building is principally used in the production of goods and if all the other criteria for
qualifying property are also met, Petitioner may claim the investment tax credit for the building for
fiscal year ended June 30, 1985.
If the resulting percentage is 50 percent or less, the building is not principally used in the
production of goods and is not qualified property for purposes of computing the investment tax
credit. However, if in the future the excess capacity space or other portion of the building

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Corporation Tax
May 17, 1989
is converted into production or qualifying storage space and a recomputation of the percentage of
usable business floor space used for production and storage results in a percentage over 50 percent,
the "principally used" test will be met.
If the "principally used" test is met in a taxable year after fiscal year ended June 30, 1985,
and all the other criteria for qualifying property are also met, Petitioner will have placed the building
in qualified use and may claim the investment tax credit on the depreciated value of the building for
the taxable year in which the property became qualified. The credit would be computed at the six
percent rate that was in effect for fiscal year ended June 30, 1985, the year the building was acquired,
constructed, reconstructed or erected.

DATED: May 17, 1989

s/FRANK J. PUCCIA
Director
Technical Services

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.