Directive


Subject:Credit for Investing in Machinery and Equipment
Tax:Corporate Franchise and Income Taxes
Statute:G.S. 105-129.9
Issued By:Corporate, Excise, and Insurance Tax Division
Date: November 20, 1998
Number:CD-98-3

This Directive describes how a taxpayer is to compute the credit for investing in machinery and equipment under G.S. 105-129.9 when the taxpayer has made eligible investments in more than one enterprise tier in a year in which it has a net decrease in investments in at least one of the enterprise tiers. When this occurs, the taxpayer must prorate its net Statewide increase in investment among the enterprise tiers in which its investment increased. The example in this Directive gives step-by-step instructions on how to make this calculation.

Credit for Investing in Machinery and Equipment

G.S. 105-129.9 allows a taxpayer that has placed eligible machinery and equipment in service in this State during the taxable year to claim a credit equal to 7% of the excess of the eligible investment amount over the applicable threshold. The eligible investment amount is the lower of two numbers. The two numbers are (1) the cost of the machinery and equipment placed in service and (2) the amount by which the cost of the taxpayer's total Statewide machinery and equipment in service on the last day of the taxable year exceeds the cost of the taxpayer's total Statewide machinery and equipment in service on the last day of the base year. The base year is the year, of the preceding three years, in which the taxpayer had the most eligible machinery and equipment in service in this State.

The applicable threshold is the amount set by statute for the enterprise tier in which the investment is made. The threshold for each tier is as follows:

Enterprise Tier Threshold
Tier One$ -0-
Tier Two100,000
Tier Three200,000
Tier Four500,000
Tier Five1,000,000

Example
At the end of its base year, Taxpayer ABC had $19 million of machinery and equipment in service in the State of North Carolina. During the year, ABC placed a total of $7 million of machinery and equipment in service Statewide and disposed of $2 million of machinery and equipment Statewide. At the end of the year, ABC had $24 million of machinery and equipment in service in the State of North Carolina. This amount represents a $5 million net increase in the machinery and equipment placed in service in North Carolina (eligible investment) over the base year. ABC's tax credit is $231,000, computed as follows:

Step One: Compute Eligible Investment Amount

Compute ABC's eligible investment amount based upon the eligible machinery and equipment in service in the entire State. In the example above, the total investment is $7 million, but because ABC disposed of $2 million of machinery and equipment in enterprise tier 2, the eligible investment amount for the entire State is $5 million.

 M & E     M & E
  at       at
TierBase Year+Investment-(Disposals)=Year-End
Tier 57.0 Million 3.0 Million   10.0 Million
Tier 42.0 Million 2.0 Million   4.0 Million
Tier 35.0 Million 1.0 Million   6.0 Million
Tier 23.0 Million   (2.0) Million 1.0 Million
        
Tier 12.0 Million 1.0 Million   3.0 Million
        
Statewide Totals19.0 Million+7.0 Million-(2.0) Million=24.0 Million
   |_____5.0 Million*_____|  

*Represents eligible investment amount in total for State (after base period computation)

Step Two: Prorate Among Tiers

To prorate the eligible investment to the appropriate tiers, multiply the eligible investment amount ($5 Million) computed in Step One by the ratio of the increase in investment for each tier that has increased to the total increase in investment for all tiers ($7 Million). The $5 Million total State eligible investment amount computed for ABC would be prorated as shown below:

TierInvestmentIncrease For
Tier
Proration Prorated
Eligible Investment
Tier 53.0 Million3.0 Million3.0/7.0 x 5 Million 2,142,857
Tier 42.0 Million2.0 Million2.0/7.0 x 5 Million 1,428,571
Tier 33.0 Million1.0 Million1.0/7.0 x 5 Million 714,286
Tier 2(2.0 Million) N/A N/A
Tier 11.0 Million1.0 Million1.0/7.0 x 5 Million 714,286
Tier 53.0 Million3.0 Million3.0/7.0 x 5 Million 2,142,857
     
Total5.0 Million7.0 Million  5,000,000

Step Three: Subtract Tier Threshold

Reduce the prorated amount of investment computed in Step Two by the statutory threshold for each tier investment as shown below, and multiply the result by 7%:

TierProrated Eligible
Investment
Before Threshold
ThresholdProrated Eligible
Investment
After Threshold
Credit
Rate
Credit
Tier 52,142,8571,000,0001,142,8577%80,000
Tier 41,428,571500,000928,5717%65,000
Tier 3714,286200,000514,2867%36,000
Tier 2N/A 100,000 07%0
Tier 1714,2860714,2867%50,000
Total   Available Credit =$231,000

If you have any questions concerning this directive, you may call the Corporate, Excise, and Insurance Tax Division of the North Carolina Department of Revenue at (919) 733-8510. You may also write to the Division at P.O. Box 871, Raleigh, N.C., 27602-0871.