When did a strategic-investment-area project qualify for Texas's former capital investment credit, and could pre-2000 costs enter the credit calculation?

Plain-English summary

Property first placed in service in a strategic investment area on or after January 1, 2000 could qualify for the former capital investment credit, including eligible costs incurred before 2000—but the corporation still had to satisfy every other statutory condition.

A corporation and a third party formed a partnership to operate a new Texas facility. The corporation would directly incur the capital expenditures and lease the assets to the partnership, while the partner supplied management and employees. The project was in a strategic investment area, and construction spending ran from 1998 through 2001.

The Comptroller answered four questions:

1. Eligibility was conditional. The corporation could qualify only if it met Section 171.802, including average-weekly-wage and group-health-plan requirements, qualified as a business under Section 171.751, and made at least a $500,000 qualified investment. The request did not contain enough facts to decide the qualified-business and qualified-investment requirements.
2. Placed-in-service date controlled. Property first placed in service in the strategic investment area on or after January 1, 2000 could qualify if all other requirements were met. Eligible costs incurred before that date could be included in the computation.
3. The credit was established when the investment was made. Section 171.803 provided a credit equal to 7.5% of qualified capital investment during the relevant period. The letter treated the credit as established in the accounting period when the property was first placed in service, even though installments were used later.
4. "Location" meant the investment site. The wage requirement applied at the same strategic-investment-area location where the qualifying investment was placed in service.

Currency note: This credit belonged to the pre-2008 franchise-tax regime. Texas replaced that tax with the margin tax effective January 1, 2008; confirm current incentive law.

What this means for you

Businesses evaluating historical incentive eligibility

The placed-in-service date could bring earlier expenditures into the credit computation, but it did not cure missing eligibility facts. Business type, investment amount, wage level, health coverage, and location all remained necessary.

Tax professionals

The letter distinguishes when costs were incurred from when property became a qualified investment. It also grounds the statutory "location" in the physical site of the qualifying investment.

Common questions

Q: Could costs incurred before January 1, 2000 count?
A: Yes, if the qualifying property was first placed in service on or after that date and all other requirements were met.

Q: Did the Comptroller definitively approve the corporation's credit?
A: No. The request lacked enough information to decide whether the corporation was a qualified business and made a qualified investment.

Q: When was the credit established?
A: In the accounting period when the property became a qualified investment by being first placed in service.

Citations and references

• Texas Tax Code Secs. 171.751, 171.801(2), 171.802, and 171.803
• Senate Bill 441, subsection (20)(e)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200003305L

Original ruling text

March 7, 2000

Dear **:

First, I want to apologize for the length of time it has taken us to respond to
your inquiry about a corporation's eligibility for the capital investment
credit. So far, our emphasis has been on establishing general guidelines and
procedures for the credits from Senate Bill 441, and we are now focusing on
specific situations.

You have indicated that a corporation and a third party ("Partner") have
entered into a joint venture and have formed a partnership to operate a new
facility in Texas. The capital investment related to this project started in
1998 and will conclude in 2001.

The corporation will directly incur the capital expenditures associated with
the project. The partnership will operate the facility and will enter into
operating leases for the capital assets from the corporation. The Partner will
provide management capability and employees to the partnership.

The corporation is a major employer in areas of the state that have been
designated as strategic investment areas ("SIAs"). The corporation also falls
under the criteria defined in Sec. 171.802(b)(1) and (2) related to applicable
weekly wage and group insurance provisions.

The facts presented indicate that the qualifying investment will be placed in
service in an SIA, rather than a county with a population of less than 50,000
by a corporation primarily engaged in agricultural processing. This response,
therefore, will be directed at qualifying investments placed in service in an
SIA.

Listed below are the questions from the ruling request and the accompanying
responses.

1. Is the corporation eligible for the capital investment credit related to the
   new facility?

Response: The corporation will be eligible for the credit provided it meets all
of the criteria set out in Sec. 171.802 of the Tax Code. In addition to the
average weekly wage and group health plan requirements, the corporation must be
a qualified business as defined by 171.751 of the Tax Code and must make a
minimum $500,000 qualified investment. 171.801(2) defines "qualified
investment." The ruling request did not provide enough information in order for
us to make a determination about the "qualified business" and "qualified
investment" requirements.

2. What is the triggering event that defines the ability of the corporation to
   begin utilizing the credit? If costs are incurred prior to the effective date
   of the statute but the placed in service date is after the effective date of
   the statute, are the amounts incurred before the effective date included in the
   credit computation?

Response: Subsection (20)(e) of Senate Bill 441 provides that a corporation may
claim the capital investment credit only for qualified investments or
expenditures made on or after January 1, 2000. Under this provision, either the
capital investment or qualifying expenditure must be made on or after January 1
2000. 171.801(2) states that an item becomes a qualified investment when the
qualifying property is first placed in service in an SIA. Therefore, in
applying the above-referenced provisions, qualifying property that is first
placed in service on or after January 1, 2000 would be eligible for the capital
investment credit provided all other eligibility requirements set out in
Subchapter Q of the Tax Code are met. The expenditures for the qualifying
property described in the preceding sentence that were incurred prior to
January 1, 2000 would be included in the credit computation.

3. When is the credit earned - the year the qualified investment is placed in
   service or the year in which the 20% credit is available for use? Specifically,
   the project is placed in service in l9X1 and the credit is available for use
   during l9X2, l9X3, l9X4, l9X5 and 19X6. Is the portion of the credit available
   for use during l9X3 earned in l9X3 or l9Xl?

Response: Sec. 171.803 states that "a corporation may establish a credit equal
to 7.5 percent of the qualified capital investment during the period upon which
the tax is based." Based on this provision, the credit is established in the
accounting period in which the qualified investment is made. As noted in the
above response, an item becomes a qualified investment when the qualifying
property is first placed in service in an SIA. In the example you gave us, the
20% installment claimed in l9X3 was established on the report based on l9X1.

4. What is the definition of "location" under Sec. 171.802(b)(1) of the
   statute?

Response: Although there is not a definition of "location" in Subchapter Q,
171.802(b)(1) specifies that the average weekly wage requirement must be paid
at the location with respect to which the credit is claimed. Because the credit
claimed is based on the qualifying investment placed in service in an SIA, the
location requirement set out in Sec. 171.802 must be the same location where
the qualifying investment is made.

This response is based on the facts presented. If there are different or
additional facts, the response may change.

If you have any questions, please give me a call at 463-4662.

Sincerely,

Jerry Oxford
Tax Policy Division