Is all IRC Section 1245 property first placed in service in a strategic investment area a 'qualified capital investment' for the Texas franchise tax capital investment credit?

Plain-English summary

A taxpayer asked whether all IRC Section 1245 property first placed in service in a strategic investment area (SIA) is a qualified capital investment (QCI) for the (pre-2008) franchise tax capital investment credit. The Comptroller explained the full definition - Section 1245 status is a necessary but not sufficient condition.

• What a QCI is. Tangible personal property first placed in service in an SIA - or first placed in service in a Texas county with a population under 50,000 if the investment is made by a corporation primarily engaged in agricultural processing.
• "Tangible personal property" means engines, machinery, tools, etc., used in a trade or business or held for investment and subject to depreciation or amortization, as described in IRC Section 1245(a). It includes property leased under a capitalized lease.
• What is excluded. Real property or buildings (and their structural components); property leased under an operating lease; and property expensed under IRC Section 179. (Tax Code Section 171.801; Franchise Tax Rule 3.578(b)(10).)

So a piece of Section 1245 property is not a QCI just because it is Section 1245 property: it must be placed in service in the right location, and it must not fall into one of the excluded categories (operating-lease property or Section 179-expensed property in particular).

Currency note: This describes the pre-2008 franchise tax capital investment credit, part of the taxable-capital/earned-surplus regime replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Businesses claiming the capital investment credit

Qualifying was a two-part filter: the asset had to be depreciable Section 1245 tangible personal property, and it had to be first placed in service in a strategic investment area (or, for agricultural processors, a small Texas county). Assets you expensed under Section 179, or held under an operating lease, did not count even if they were otherwise Section 1245 property.

Accountants and tax professionals

Screen candidate assets against all three limits: (1) Section 1245(a) depreciable tangible personal property (capitalized leases included); (2) placed in service in an SIA or a qualifying under-50,000-population agricultural-processing county; and (3) not real property/buildings, not operating-lease property, and not Section 179-expensed. The Section 179 exclusion matters most when planning whether to expense or capitalize.

Common questions

Q: Does all Section 1245 property in a strategic investment area qualify?
A: No. It must also be depreciable tangible personal property placed in service in the SIA and not fall within the exclusions (operating leases, Section 179-expensed property, real property/buildings).

Q: Can leased property qualify?
A: Capitalized-lease property can qualify; operating-lease property is excluded.

Q: What about property I expensed under Section 179?
A: It is excluded from qualified capital investment.

Q: Is there a rural alternative to the SIA requirement?
A: Yes - property first placed in service in a Texas county with a population under 50,000, if the investment is made by a corporation primarily engaged in agricultural processing.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 171.801 (definition of qualified capital investment and strategic investment area)
• 34 Tex. Admin. Code Sec. 3.578(b)(10) (qualified capital investment / tangible personal property definition)
• IRC Sec. 1245(a) (depreciable tangible personal property that can qualify)
• IRC Sec. 179 (property expensed under Section 179 is excluded)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200311237L

Original ruling text

November 20, 2003

To: **

Dear **:

Thank you for your inquiry concerning the franchise tax capital investment
credit. You ask if all IRC Section 1245 property that is first placed in
service in an SIA a qualified capital investment (QCI).

A QCI is tangible personal property first placed in service in a "strategic
investment area" (SIA), or first placed in service in a Texas county with a
population under 50,000 if the QCI is made by a corporation primarily engaged
in agricultural processing.

"Tangible personal property" means engines, machinery, tools, etc., used in a
trade or business or held for investment and subject to depreciation or
amortization, as described in Section 1245(a) of the Internal Revenue Code.
The term includes tangible personal property leased under a capitalized lease.
The term excludes real property or buildings (and their structural components);
property leased under an operating lease; and property expensed under Section
179 of the Internal Revenue Code. See Texas Tax Code Section 171.801 and
Franchise Tax Rule 3.578(b)(10).

The statute and rule mentioned, as well as other related information, are
available online at http://www.window.state.tx.us/taxinfo/franchise/index.html.

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

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

If you have questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 59952.

Sincerely,

Teresa Bostick
Tax Policy Division