For the Texas franchise-tax capital investment credit, what costs count as a qualified capital investment?

Plain-English summary

A taxpayer asked how to measure a "qualified capital investment" for the (pre-2008) franchise-tax capital investment credit, defined in Tax Code Section 171.801(2) as "tangible personal property first placed in service." The Comptroller addressed two cost questions:

1. Transportation, installation, and labor costs — included. A reasonable reading of the "first placed in service" language includes transportation costs and direct labor costs necessary to fabricate, install, or place the tangible personal property in service.
2. Full federal depreciable basis — not included. The qualified capital investment does not necessarily include all costs in the depreciable basis of Section 1245(a) property for federal income-tax purposes. Section 171.801(2) does not define the investment in terms of depreciable basis and does not reference the IRC basis provisions (Sections 1011, 1012, 1016). So costs such as indirect labor, interest, intangibles, and overhead are excluded.

The Comptroller contrasted this with the earlier enterprise-project deduction under Tax Code Section 171.1015, which was based on the depreciated value of qualifying capital equipment.

Important currency note: This letter interprets the pre-2008 franchise tax and its capital investment credit. The 2007 legislation (House Bills 3 and 3928) replaced that tax with the current margin tax effective January 1, 2008, and this credit is no longer part of the tax. Treat the holding as historical and confirm current law before relying on it.

What this means for you

Businesses that claimed the franchise-tax capital investment credit

When sizing a qualified capital investment, you could add freight and direct labor to place the asset in service, but you could not simply use the property's full federal depreciable basis — indirect and overhead-type costs were carved out. This credit belongs to the pre-2008 tax and does not exist under the margin tax.

Accountants and tax professionals

Note the statutory-text reasoning: because Section 171.801(2) keys off "first placed in service" rather than depreciable basis, the Comptroller allowed direct placement costs but rejected the broader IRC basis build-up. Useful for open pre-2008 report years only; re-verify against current law.

Common questions

Q: Do transportation and labor costs count toward a qualified capital investment?
A: Yes — transportation and the direct labor costs needed to fabricate, install, or place the property in service are included.

Q: Can I use the full federal depreciable basis of the property?
A: No. Indirect labor, interest, intangibles, and overhead are excluded, because the statute does not define the investment by depreciable basis.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 171.801(2) (defines qualified capital investment as tangible personal property first placed in service, referencing IRC Section 1245(a))
• Tex. Tax Code Sec. 171.1015 (prior enterprise-project deduction based on depreciated value of capital investment)
• IRC Sec. 1245(a) (Section 1245 tangible personal property)
• IRC Secs. 1011, 1012, and 1016 (rules for determining depreciable basis)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200608709L

Original ruling text

August 31, 2006

Dear **:

Thank you for your letter concerning the definition of qualified capital
investment for the franchise tax capital investment credit.

The first issue you raise is the inclusion of transportation, installation and
labor costs in the determination of the amount of the qualified capital
investment.

Texas Tax Code Sec. 171.801(2) defines a qualified capital investment as
“…tangible personal property first placed in service…” Based on this language
we agree a reasonable interpretation should include transportation costs and
direct labor costs necessary to fabricate, install or place the tangible
personal property in service.

The second issue you raise is that the qualified capital investment should
include all costs incorporated in the depreciable basis of Section 1245(a)
tangible personal property.

Prior to the investment credit, Tax Code Sec. 171.1015 provided for a deduction
for enterprise projects based on its capital investment. The deduction was
based on the depreciated value of capital equipment or other investment that
qualified for depreciation for federal income tax purposes. Although Tax Code
Sec. 171.801(2) refers to property described in Section 1245(a) in determining
qualified capital investment, Sec. 171.801(2) does not contain similar language
in defining qualified capital investment in terms of depreciable basis.
Additionally, Sec. 171.801(2) does not refer to IRC Sections 1011, 1012 or
1016, the applicable IRC Sections used to determine the depreciable basis of
Section 1245 property. Therefore, we do not agree that the qualified capital
investment necessarily includes all costs incorporated in the depreciable basis
of Section 1245(a) property for federal tax purposes. For example, the
qualified capital investment does not include costs such as indirect labor
costs, interest, intangibles, and overhead.

If you need any additional information, please call our toll free line at (800) 248-4093.

Sincerely,

William S. Hamner
Assistant Director of Tax Administration