Guidelines for Article 3A Tax Credits
Tax Year 2003
I. Purpose
This section sets out guidelines for the tax credits in Article 3A of Chapter
105 of the General Statutes, also known as the William S. Lee Quality Jobs and
Business Expansion Act. The section applies to tax years beginning on or after
January 1, 2003. Article 3A has been amended each year since its enactment.
This section does not attempt to review the law in effect prior to January 1,
2003.
These guidelines are published by the Department on its website at www.dor.state.nc.us
and are updated periodically as issues arise that require clarification. The
publication date of the document is set out at the bottom of each page. The
first publication date of the document was June 2002. That publication applied
to tax years beginning on or after January 1, 2001 and before January 1, 2002.
The second publication of the document was dated April 2003 and applied to tax
years beginning on or after January 1, 2002 and before January 1, 2003. The
updated guidelines may be accessed through the “Business” portal
of the DOR web page.
II. Overview
The Article 3A tax credits are designed to attract certain types of new businesses
to North Carolina and to foster expansions of certain types of businesses in
North Carolina. The credits are based on a system that divides the State into
five enterprise tiers, with tier one being the most economically distressed
and tier five being the least economically distressed. Eligibility requirements
are easier to meet and credits are increased for business expansion occurring
in the lower tiers. Each county is assigned a tier designation by the Secretary
of Commerce on or before December 31st of each year. Generally, a designation
applies only to the calendar year following the designation. A tier one or tier
two area, however, may not be redesignated as a higher-numbered enterprise tier
area until it has been in its designated enterprise tier area for at least two
consecutive years. The Department of Commerce publishes a list of the counties
and their respective tier designations.
Within each tier, there may be designated development zones. These designations
recognize defined areas of economic need within a tier. For purposes of the
wage standard requirement, the credit for investing in machinery and equipment,
and the credit for worker training, a development zone is considered an enterprise
tier one area. Additionally, credits for creating jobs are increased by $4,000
per job for jobs located within a development zone. Upon the request of a taxpayer
or a local government, the Secretary of Commerce will determine whether an area
is in a development zone. The determination is based on various economic factors.
If an area is designated as a development zone, the designation is effective
for 24 months following the date of the designation. The Department of Commerce
publishes annually a list of all development zones with a description of their
boundaries.
For tax years beginning on or after January 1, 2003, a parcel of property
that is partially in a development zone is considered to be entirely within
the development zone if all of the following conditions are met:
- At least fifty percent of the parcel is located within the development zone.
- The parcel was in existence and under common ownership prior to the most
recent federal decennial census.
- The parcel is a portion of land made up of one or more tracts or tax parcels
of land that is surrounded by a continuous perimeter boundary.
III. Credits Available
For tax years beginning on or after January 1, 2003, credits are available
for:
- Creating jobs
- Investing in machinery and equipment
- Technology commercialization
- Research and development
- Worker training
- Investing in central office or aircraft facility property
- Development zone projects
- Substantial investment in other property
IV. Substantiation (G.S. 105-129.7)
To claim a credit, the taxpayer must provide any information considered necessary
by the Secretary of Revenue to determine and verify the amount of the credit
to which the taxpayer is entitled. The burden of proving eligibility for the
credit and the amount of the credit rests upon the taxpayer. The taxpayer must
submit a portion of the qualifying information with the tax return. That information
is reported on the Department of Revenue NC-478 form series. The taxpayer must
maintain additional documentation needed to substantiate the credit and make
it available for inspection by the Secretary of Revenue.
V. General Eligibility Requirements (G.S. 105-129.4)
The taxpayer must satisfy all general eligibility requirements in order to
qualify for any of the credits listed in Section III, except the credit for
development zone projects. If a taxpayer is uncertain about its eligibility
for a credit, the taxpayer may request specific advice in writing from the Secretary
of Revenue.
The general eligibility requirements are listed below, followed by a description
of each specific requirement:
- Be an eligible business type
- Meet the wage standard specified for the credit
- Provide health insurance for employees as specified for the credit
- Have a good environmental record
- Have a good Occupational Safety and Health Act (OSHA) record
- Have no overdue tax debts
VI. Eligible Business Types (G.S. 105-129.4(a))
Types
Article 3A allows tax credits only to certain types of businesses.
Under the Article, the taxpayer must meet one of the following descriptions to
be eligible for a credit. For definitions of the business types described below,
see G.S. 105-129.2.
- Central Office or Aircraft Facility. -- The taxpayer operates a central
office or aircraft facility that creates at least 40 new jobs and the jobs,
investment, and activity with respect to which a credit is claimed are used
in that office or facility. Generally, 40 new jobs are created if the taxpayer
hires at least 40 additional full-time employees to fill new positions at
the office within 12 months after the taxpayer first uses the property as
a central office or aircraft facility. If a taxpayer uses temporary space,
however, for the central office or aircraft facility functions during completion
of the central office or aircraft facility property, the jobs must be created
during the period starting 24 months before and ending 12 months after the
completion of the property.
- Air Courier Services or Data Processing. -- The primary business of the
taxpayer is one of the following and the jobs, investment, and activity with
respect to which a credit is claimed are used in that business:
- Air courier services
- Data processing
- Manufacturing, Warehousing, or Wholesale Trade. -- The primary business
of the taxpayer is one of the following and the jobs, investment, and activity
with respect to which a credit is claimed are used in any of the listed businesses:
- Manufacturing
- Warehousing
- Wholesale trade
- Computer Services or Electronic Mail Order House. -- The primary business
of the taxpayer or the primary activity of an establishment of the taxpayer
is one of the following and the jobs, investment, and activity with respect
to which a credit is claimed are used in that business:
- Computer services
- An electronic mail order house that creates at least 250 new jobs and
is located in an enterprise tier one, tier two, or tier three area.
- Customer Service Center. -- The taxpayer operates a customer service center
and meets all of the following conditions:
- The taxpayer's primary business is a telecommunications or financial
services company as defined by NAICS.
- The primary activity of an establishment of the taxpayer is a customer
service center located in an enterprise tier one, tier two, or tier three
area.
- The jobs, investment, and activity with respect to which a credit is
claimed are used in the operation of the customer service center.
- Warehousing at Establishment. -- The primary activity of an establishment
of the taxpayer is warehousing and the taxpayer meets both of the following
conditions:
- The warehousing establishment is located in an enterprise tier one,
tier two, or tier three area and serves 25 or more establishments of the
taxpayer in at least five different counties in one or more states.
- The jobs, investment, and activity with respect to which a credit is
claimed are used in the warehousing establishment.
- Research and Development. -- For the purpose of determining eligibility
under this subsection for the credit for research and development in G.S.
105-129.10, the following special rules apply:
- If the primary activity of an establishment of the taxpayer in this
State is computer services, the taxpayer’s qualified research expenditures
in this State are considered to be computer services.
- For all other taxpayers, the taxpayer’s qualified research expenditures
in this State are considered to be used in the primary business of the
taxpayer.
Determining Primary Business
For most of the eligible business types, the law specifies that
the taxpayer's primary business must be a designated business. To claim a credit
as a taxpayer that provides air courier services or data processing services,
for example, the provision of these services must be the primary business of
the taxpayer and not just the taxpayer's primary activity at one establishment.
Similarly, to claim a credit as a customer service center, the taxpayer's primary
business must be telecommunications or financial services.
The determination of whether an activity of a company is its primary business
is based on the principal product or group of products the taxpayer produces
or distributes or the principal services the taxpayer provides. The principal
product or service is determined based on the NAICS guidelines for determining
industry classification. The activities at all the taxpayer's establishments
are considered in determining the taxpayer's primary business.
Determining Primary Activity at an Establishment
For a few of the eligible business types, the law only requires the taxpayer's
primary activity at an establishment to be a designated business. The eligible
business types for providing computer services, operating an electronic mail
order house, and engaging in warehousing, for example, set requirements for
the taxpayer's primary business activity at an establishment but not the taxpayer's
primary business taken overall. The credit for a customer service center sets
requirements for the taxpayer's primary business activity at an establishment
and sets a different requirement for the taxpayer's primary business.
The determination of whether an activity at an establishment is the primary
business activity is based on the proper classification of the establishment
under the NAICS Code. If more than one activity is conducted at the same establishment,
the primary activity of the establishment is determined based on the NAICS guidelines
for determining industry classification.
Determining What Jobs, Investment, and Activity Qualify for Credits
All the eligible business types require jobs, investment, and
activity to be used in a specified aspect of the taxpayer's business. To satisfy
this requirement, that aspect must be the primary activity of the taxpayer at
the establishment where the credits are claimed.
For some eligible business types, the jobs, investment, and activity that qualify
for the credit must be used in the taxpayer's primary business. For these eligible
business types, the taxpayer's primary business must be one of the eligible
business types and, if the taxpayer has more than one business establishment,
the primary activity at the taxpayer's establishment where the credits are claimed
must be the same as the taxpayer's primary business. When these conditions are
met, the jobs, investment, and activity at the establishment are considered
to be part of the taxpayer's primary business and to satisfy the requirement
of being used in that business. The eligible business types for air courier
services, data processing, manufacturing, warehousing, wholesale trade, computer
services, and electronic mail order house fall into this category. The last
five of these also fall into other categories due to alternative ways to qualify
for the credits.
Some eligible business types have different requirements for primary business
and primary business activity at an establishment. For these eligible business
types, the taxpayer's primary business must be the specified type of business,
the taxpayer must have more than one business establishment, the taxpayer's
primary activity at the establishment where the credits are claimed must be
the specified type of activity, and the taxpayer's primary business and the
primary business activity at the establishment must be different. When these
conditions are met, the jobs, investment, and activity at the establishment
are considered to be part of the taxpayer's primary business activity at the
establishment and to satisfy the requirement of being used in that specified
business activity. The eligible business types for manufacturing, warehousing,
wholesale trade, computer services, electronic mail order house, and customer
service center fall into this category. The first five of these also fall into
other categories due to alternative ways to qualify for the credits.
Some eligible business types set no requirements on the taxpayer's primary
business and, instead, set requirements only on the primary business activity
at an establishment. For these credits, the primary business activity at the
establishment where the credits are claimed must be the specified type of activity.
This activity may also be the taxpayer's primary business, but it does not matter
if the primary business activity at the establishment and the taxpayer's primary
business are the same or are different. If they are different, however, the
taxpayer must have more than one establishment. At the establishment, if the
primary business activity is the specified type of activity, then the jobs,
investment, and activity at the establishment are considered to be part of the
primary business activity and to satisfy the requirement of being used in that
primary business activity. The eligible business types for computer services,
electronic mail order house, and warehousing at an establishment fall into this
category. The eligible business types for computer services and electronic mail
order house also fall into another category due to alternative ways to qualify
for the credits.
Two eligible business types set requirements for a business function of the
taxpayer rather than for primary business or primary business activity at an
establishment. These two eligible business types are for a central office or
an aircraft facility. For these eligible business types, the jobs, investment,
and activity must be used in the central office function or the aircraft facility
function. In most cases, the establishment where the central office or the aircraft
facility is located will have a NAICS Code reflecting a central office or aircraft
facility, but a central office or aircraft facility can be located in a building
that includes various functions.
In summary, except for the eligible business types for a central office or
an aircraft facility, the determination of whether jobs, investment, and activity
qualify turns on the primary business activity at an establishment plus, for
some eligible business types, the primary business of the taxpayer. When these
conditions are met, all the jobs, investment, and activity at the establishment
are considered to be used in the qualifying business, even though they may be
part of a support function at the establishment.
The following examples illustrate when jobs, investment, and activity satisfy
the requirement of being used in a business:
- ABC Manufacturing Company
ABC's primary business is manufacturing. In the 2003 tax year, ABC constructs
and begins operating a North Carolina manufacturing facility. The new jobs,
investment, and activity at the North Carolina manufacturing facility are
eligible for credits, subject to the other requirements of Article 3A. This
is because ABC's primary business of manufacturing is an eligible business
type and its primary business activity at the North Carolina facility is the
same as its primary business. The jobs, investment, and activity at the North
Carolina establishment therefore satisfy the requirement of being used in
the manufacturing business.
- EFG Manufacturing Company
EFG's primary business is manufacturing. All of EFG's manufacturing plants
are located outside North Carolina. In the 2003 tax year, EFG constructs and
begins operating a North Carolina warehouse facility. The new jobs, investment,
and activity at the North Carolina warehouse facility are eligible for credits,
subject to the other requirements of the Act. This is because EFG's primary
business is manufacturing, and the jobs, investment, and activity are used
in the warehousing business.
- XYZ Manufacturing Company
XYZ's primary business is manufacturing. XYZ has one manufacturing plant located
in the State. XYZ has previously qualified for credits for new jobs, investment,
and activity used in the manufacturing business. During the 2003tax year,
XYZ purchases a facility in North Carolina that conducts marketing, customer
service, and product repairs. Additionally, a retail outlet is on site at
the newly purchased facility. The new jobs investment, and activity at the
newly purchased facility are not eligible for credits. This is because the
primary business activity at the facility is not manufacturing, wholesale
trade, or warehousing.
VII. Wage Standard Test (G.S. 105-129.4(b))
The taxpayer must satisfy a wage standard test with respect to each potential
credit except the worker training credit and the credit for substantial investment
in other property. The test is performed by comparing the applicable wage standard
for the taxpayer to the wage standard for the relevant county. The county wage
standard is obtained from the Department of Commerce. If the taxpayer’s
tax year is other than a calendar year, the taxpayer must use the wage standard
for the calendar year in which the taxpayer’s tax year begins. The taxpayer's
wage standard must equal or exceed 110% of the county wage standard. The wage
standard test does not apply to any credit in a tier one or tier two area or
in a development zone.
The wage standard test that applies depends on the credit, as explained below.
Credit for Creating Jobs
The test is a two-part test. The first part requires the combined average weekly
wage of the jobs for which the credit is claimed to meet the wage standard.
The second part requires the combined average weekly wage of all jobs at the
location with respect to which a credit is claimed to meet the wage standard.
The average wage for both parts of the test is determined for the tax year in
which the activity that qualifies for the credit occurs, even if the taxpayer’s
tax year is not a calendar year. For part-time employees, a full-time equivalency
factor must be used. However, all part-time jobs for which the taxpayer provides
health insurance, as described in G.S. 105-129.4(b2), are considered to meet
the wage standard, regardless of the actual wages for the job. If there are
potential credits at more than one location, both tests must be applied separately
at each location. No credits are allowed with respect to jobs at a location
unless both tests are met.
The following example demonstrates the calculation of the wage standard test
when new jobs are created during the year at multiple locations. Assume that
the taxpayer meets all the other eligibility requirements in Article 3A.
Taxpayer creates 75 new jobs at a tier four location during the year and
50 new jobs at a tier five location. The combined average weekly wage of the
75 jobs created at the tier four location meets the wage standard and the
combined average weekly wage of the 50 jobs created at the tier five location
meets the wage standard. The jobs at both locations therefore meet the first
part of the test.
The combined average weekly wage of all the jobs at the tier four location
meets the wage standard. However, the combined average weekly wage of all the
jobs at the tier five location does not meet the wage standard. Consequently,
the taxpayer is eligible to claim a credit for the 75 jobs created at the tier
four location, but not the 50 jobs created at the tier five location. This is
because the jobs at the tier four location meet the second part of the test
and the jobs at the tier five location do not.
Credit for Worker Training
The credit for worker training is not subject to a wage standard test.
Credit for Substantial Investment in Other Property
The credit for substantial investment in other property is not subject to a
wage standard test.
All Other Credits
Only the second part of the wage standard test for the jobs credit applies
to the other credits. The other credits are the credit for investing in machinery
and equipment, the credit for research and development and the credit for investing
in real property for a central office or an aircraft facility. The taxpayer
is eligible for these credits if the combined average weekly wage of all jobs
at the location with respect to which the credit is claimed meets the wage standard.
The average wages of the jobs at the location are determined for the tax year
in which the activity that qualifies for the credit occurs, even if the taxpayer’s
tax year is not a calendar year. For part-time employees, a full-time equivalency
factor must be used.
VIII. Wage Standard Calculations
One of the wage tests is to determine if the average wage of all jobs at a
business location meets the wage standard. To make that determination, complete
the following steps:
- For each month in the tax year, identify the number of employees for the
location who were included on line 1 of the Employer’s Quarterly Tax
and Wage Report (NCUI 101) as filed with the Employment Security Commission.
- Add the number of employees identified in a.i above for each month and divide
that amount by 12.
- Divide the total wages include on line 2 of Form NCUI 101 for each month
for this location for the tax year by the number calculated in a.ii above.
- Divide the amount calculated in a.iii above by 52.
- Compare the amount calculated in a.iv above to the applicable wage standard
for the county where the jobs were located.
The other wage test is to determine if the average wage of jobs for which a
potential credit may be claimed meets the wage standard. To make that determination,
complete the following steps:
- For each employee, divide the number of hours worked, not including overtime,
by 2080. Hours worked included all regular hours for which the employee received
pay including vacation and sick time.
- Divide each employee’s total wages for the tax year by the amount
calculated in b.i above.
- Divide each amount calculated in b.ii above by 52.
- Sum the amounts calculated in b.iii for each employee and divide
by the number of employees.
- Compare the amount calculated in b.iv above to the applicable wage
standard for the county where the jobs were located.
The above calculations are to be used if the taxpayer is in business at the
location with respect to which credits are claimed for its entire tax year.
If the taxpayer is in business at the location for only a portion of the year,
the calculations must be adjusted accordingly. For example, Company X is an
existing North Carolina taxpayer that files on a calendar year basis. On April
1, 2004, it expands its operations by opening a new manufacturing plant in North
Carolina. Subsection 3 below shows how Company X would determine if the average
wage of all jobs at the new location meets the wage standard. Subsection 4 below
shows how Company X would determine if the average wage of jobs at the new location
for which a potential credit may be claimed meets the wage standard.
To determine if jobs at the Company X New Location meet the wage standard in
the 2004 tax year, complete the following steps:
- For the months April through December, identify the number of employees
for the location who were included on Line 1 of the Employer’s Quarterly
Tax and Wage Report (NCUI 101) as filed with the Employment Security Commission.
- Add the number of employees identified in c.i for each month and
divide that amount by 9.
- Divide the total wages included on Line 2 of form NCUI 101 for this location
for April through December by the number calculated in c.ii.
- Divide the amount calculated in c.iii by 39.
- Compare the amount calculated in c.iv to the applicable wage standard
for the county where the jobs are located.
To determine if jobs at the Company X New Location for which a potential credit
may be claimed meet the wage standard in the 2004 tax year, complete the following
steps:
- For each employee, divide the number of hours worked, not including overtime,
by 1,560 (2,080 times .75). Hours worked includes all regular hours for which
the employee received pay including vacation and sick time.
- Divide each employee’s total wages for the months April through December
by the amount calculated in d.i.
- Divide each amount calculated in d.ii by 39.
- Sum the amounts calculated in d.iii for each employee and divide
by the number of employees.
- Compare the amount calculated in d.iv to the applicable wage standard for
the count where the jobs are located.
IX. Health Insurance (G.S. 105-129.4(b2))
Article 3A makes the provision of health insurance a condition for qualifying
for the credits. The reason for this is to ensure that the credits are allowed
only for quality jobs.
A taxpayer provides health insurance if it pays at least 50% of the premiums
for health care coverage that equals or exceeds the minimum provisions of the
basic health care plan of coverage recommended by the Small Employer Carrier
Committee pursuant to G.S. 58-50-125. The specific health insurance requirements
for each credit are described below.
Credit for Creating Jobs and Credit for Worker Training
A taxpayer is eligible for a credit for creating jobs or for worker training
if the taxpayer provides health insurance for the jobs for which a credit is
claimed. The insurance must be provided at the time the jobs are created or
the workers are trained and must be maintained in each year the taxpayer claims
an installment or a carryforward of the credit. To ensure that a taxpayer satisfies
this requirement, the taxpayer must provide with the tax return a certification
that the taxpayer provides health insurance for the affected jobs. This applies
to the return on which the taxpayer qualifies for the credit, a return claiming
an installment of the credit, and a return claiming a carryforward of the credit.
All Other Credits
The health insurance requirement for the jobs credit and the worker training
credit differs from the requirement for all the other credits. The other credits
are the credit for investing in machinery and equipment, the credit for research
and development, the credit for investing in real property for a central office
or an aircraft facility, and the credit for substantial investment in other
property. The taxpayer is eligible for these credits if the taxpayer provides
health insurance for all of the full-time positions at the location with respect
to which a credit is claimed. The insurance must be provided at the time of
the activity that qualifies for the credit and must be maintained. The taxpayer
must provide with the tax return a certification that the taxpayer provides
health insurance for all the full-time positions at the location. This applies
to the return on which a taxpayer qualifies for the credit and a return claiming
an installment or carryforward of the credit.
X. Environmental Impact (G.S. 105-129.4(b3))
Article 3A requires recipients of credits to have good environmental records.
The environmental requirements are the same for all credits. A taxpayer is eligible
for a credit only if the taxpayer certifies that, at the time the taxpayer first
claims the credit, the taxpayer has no pending administrative, civil, or criminal
enforcement action based on alleged significant violations of any program implemented
by an agency of the Department of Environment and Natural Resources, and has
had no final determination of responsibility for any significant administrative,
civil, or criminal violation of any program implemented by an agency of the
Department of Environment and Natural Resources within the last five years.
A significant violation is a violation or an alleged violation that does not
satisfy any of the conditions of G.S. 143-215.6B(d).
The Department of Revenue receives notification from the Department of Environment
and Natural Resources annually of every person that currently has any of these
pending actions and every person that has had any of these final determinations
within the last five years. The Department of Revenue uses this information
when reviewing eligibility for the credits.
The time the taxpayer first claims a credit is the date the taxpayer first
files a tax return concerning the credit. The first tax return concerning the
credit is the tax return for the year in which the taxpayer engaged in the qualifying
activity.
XI. Occupational Safety and Health Programs (OSHA)
(G.S. 105-129.4(b4))
Article 3A requires recipients of credits to have good occupational safety
and health (OSHA) records. The OSHA requirements are the same for all credits.
A taxpayer is eligible for a credit only if the taxpayer certifies that, at
the business location with respect to which the credit is claimed, the taxpayer
has had no citations under the Occupational Safety and Health Act that have
become a final order within the past three years for willful serious violations
or for failing to abate serious violations. The certification must be made at
the time the taxpayer first claims the credit. A "serious violation"
is defined in G.S. 95-127.
The Department of Revenue receives notification from the Department of Labor
annually of all employers with citations that have become final orders within
the past three years. The Department of Revenue uses this information when reviewing
eligibility for the credits.
The time the taxpayer first claims a credit is the date the taxpayer first
files a tax return concerning the credit. The first tax return concerning the
credit is the tax return for the year in which the taxpayer engaged in the qualifying
activity.
XII. Large Investment Enhancements (G.S. 105-129.4(b1))
A taxpayer who is otherwise eligible for a tax credit under this Article becomes
eligible for the large investment enhancements provided for credits under this
Article if the Secretary of Commerce makes a written determination that the
taxpayer is expected to purchase or lease, and place in service in connection
with the eligible business within a two-year period, at least one hundred fifty
million dollars ($150,000,000) worth of one or more of the following: real property,
machinery and equipment, or central office or aircraft facility property. In
the case of an interstate air courier that has or is constructing a hub in this
State and, effective for taxable years beginning on or after January 1, 2004,
in the case of an eligible major industry, this investment may be placed in
service in connection with the eligible business within a seven-year period.
To be an eligible major industry, the taxpayer must be primarily engaged in
bioprocessing or pharmaceutical and medicine manufacturing, as defined in G.S.
105-164.14(j)(3), and be certified by the Secretary of Commerce as planning
to invest at least one hundred million dollars ($100,000,000) of private funds
to acquire, construct, and equip a facility in this State to engage in one or
more of those industries.
XIII. No Overdue Tax
A taxpayer is ineligible for an Article 3A tax credit if the taxpayer has an
overdue tax debt at the time the taxpayer claims an installment or carryforward
of a credit. An overdue tax debt is defined in G.S. 105-243.1(a)(1) as “[a]ny
part of a tax debit that remains unpaid 90 days or more after the notice of
final assessment was mailed to the taxpayer. The term does not include a tax
debt, however, if the taxpayer entered into an installment agreement for the
tax debt under G.S. 105-237 within 90 days after the notice of final assessment
was mailed and has not failed to make any payments due under the installment
agreement.”
XIV. General Administration
- Sunset (G.S. 105-129.2A(a), (a1), and (a2)
Article 3A is repealed for business activities that occur on or after January
1, 2006, with these exceptions:
- In the case of an interstate air courier that enters into a real estate
lease on or before January 1, 2006, with an airport authority that provides
for the lease of at least 100 acres of real property with a lease term
in excess of 15 years, this Article is repealed effective for business
activities that occur on or after January 1, 2010.
- In the case of a taxpayer that qualifies as an eligible major industry
on or before January 1, 2006, this Article is repealed effective for
business activities that occur on or after January 1, 2010. (Effective
for taxable years beginning on or after January 1, 2004.)
- Expiration (G.S. 105-129.4(a2) and (b2))
This section addresses general expiration provisions applying to all credits
based on failure to continue to meet general eligibility requirements. In
addition, there are expiration provisions that apply specifically to each
credit. The specific provisions are discussed in the sections devoted to
each credit. The general expiration provisions are listed below. When a
credit expires, the taxpayer may not take any remaining installments of
the credit.
The expiration of a credit may also affect the taxpayer's ability to
take carryforwards of a credit. Under the first two circumstances described
below, the taxpayer may continue to claim carryforwards of previous installments
when a credit expires. Under the third circumstance, the carryforwards
as well as the installments expire. See the section on Carryforwards of
Unused Credits for additional information.
Circumstances That Result in Expiration of a Credit
- During the period that installments of a credit accrue, the taxpayer
no longer meets one of the conditions for an eligible business type.
- During the period that installments of a credit accrue, the number
of jobs of an eligible business falls below the minimum number required.
When this happens, any credit associated with that business expires;
the expiration is not limited to the jobs tax credit.
- The taxpayer ceases to provide health insurance for its employees.
- Forfeiture (G.S. 105-129.4(d))
A taxpayer that forfeits a credit is liable for all past taxes avoided as
a result of the credit plus interest at the rate established under G.S.
105-241.1(i), computed from the date the taxes would have been due if the
credit had not been allowed. The past taxes and interest are due 30 days
after the date the credit is forfeited. A taxpayer that fails to pay the
past taxes and interest by the due date is subject to the penalties provided
in G.S. 105-236. Forfeiture provisions are listed below.
All Credits
A taxpayer forfeits a credit allowed if the taxpayer was not eligible
for the credit for the calendar year in which the taxpayer engaged in the
activity for which the credit was claimed.
Worker Training
If a taxpayer forfeits the credit for creating jobs, the technology commercialization
credit, or the credit for investing in machinery and equipment, it also
forfeits any credit for worker training claimed for the jobs for which the
credit for creating jobs was claimed or the jobs at the location with respect
to which the technology commercialization credit or the credit for investing
in machinery and equipment was claimed.
Substantial Investment in Other Property
A taxpayer forfeits the credit for substantial investment in other property
if it fails to timely make the required level of investment or fails to
timely create the required number of new jobs.
Technology Commercialization Credit
A taxpayer forfeits the technology commercialization credit if it
fails to timely make the required level of investment or if it fails to
meet the terms of its licensing agreement with a research university. If
a taxpayer claimed a 20% technology commercialization credit and fails to
make the required level of investment for the 20% credit, but does make
the required level of investment for the 15% credit, the taxpayer forfeits
one-fourth of the 20% credit.
Large Investment Enhancements
A taxpayer forfeits a large investment enhancement of a tax credit
if it fails to timely make the required level of investment.
- Change in Ownership of Business (G.S. 105-129.4(e))
The sale, merger, consolidation, conversion, acquisition, or bankruptcy
of a business, or any transaction by which an existing business reformulates
itself as another business does not create new eligibility in a succeeding
business with respect to credits for which the predecessor was not eligible.
A successor business may, however, take any installment of or carried-over
portion of a credit that its predecessor could have taken if it had a tax
liability. The acquisition of a business is a new investment that creates
new eligibility in the acquiring taxpayer under Article 3A if any of the
following conditions are met:
- The business closed before it was acquired.
- The business was required to file a notice of plant closing or mass
layoff under the federal Worker Adjustment and Retraining Notification
Act, 29 U.S.C. §2102, before it was acquired.
- The business was acquired by its employees through an employee stock
option transaction or another similar transaction.
The term "business" means a taxpayer or an establishment. For
example, a taxpayer that purchases one of five plants from an unrelated
entity has acquired a business, and must meet one of the three conditions
described above in order to create new eligibility for its investment.
- Tax Election (G.S. 105-129.5)
The credits are allowed against the franchise tax, the income tax, or
the gross premiums tax. The taxpayer elects the tax against which a credit
will be claimed when filing the return on which the first installment of
the credit is claimed. This election is binding on all future installments
and carryforwards of that credit. A special election is provided for the
technology commercialization credit. A general election applies to all other
credits.
Technology commercialization credit
The technology commercialization credit may be divided between the
taxes against which it is allowed. The taxpayer elects the percentage of
the credit that will be taken against each tax when filing the return on
which the credit is first taken. This election is binding. The percentage
of the credit elected to be taken against each tax may be carried forward
only against the same tax.
All Other Credits
The taxpayer must take a credit against only one of the taxes against
which it is allowed.
- Fifty Percent (50%) Cap on Credits (G.S. 105-129.5(b))
The total of all credits may not exceed 50% of the tax against which
they are claimed for the taxable year, reduced by the sum of all other credits
allowed against that tax, except tax payments made by or on behalf of the
taxpayer.
- Carryforward of Unused Credit (G.S. 105-129.5(c))
Generally, any unused portion of a credit may be carried forward for
the succeeding five years. Several credits have longer carryforward periods,
however. Those credits and their carryforward periods are listed below.
20-Year Carryforward
Any unused portion of the following credits may be carried forward
for 20 years:
- Technology commercialization.
- Substantial investment in other property.
- Credits concerning a "large investment" ($150,000,000).
A taxpayer is eligible for the large investment enhancement if the Secretary
of Commerce makes a written determination that the taxpayer is expected
to purchase or lease, and place in service in connection with the eligible
business within a two-year period (seven years for interstate air couriers
and, effective for taxable years beginning on or after January 1, 2004,
eligible major industries), at least $150,000,000 worth of one or more
of the following: real property, machinery and equipment, or central
office or aircraft facility property. If the taxpayer fails to make
the required level of investment within the two-year period (seven years
for interstate air couriers and, effective for taxable years beginning
on or after January 1, 2004, eligible major industries), the taxpayer
forfeits the longer carryforward period.
15-Year Carryforward for Research and Development
Any unused portion of a research and development credit may be carried
forward for the succeeding 15 years.
10-Year Carryforward for $50,000,000 Investment
Any unused portion of a credit may be carried forward for the succeeding
10 years if the taxpayer is expected to purchase or lease, and place in
service in connection with the eligible business within a two-year period
(seven years for interstate air couriers and, effective for taxable years
beginning on or after January 1, 2004, eligible major industries), at least
$50,000,000 worth of one or more of the following: real property, machinery
and equipment, or central office or aircraft facility property. The Secretary
of Commerce must issue a written determination that the required investment
is expected to be made in order for this extended carryforward period to
apply. If the taxpayer fails to make the required level of investment within
the two-year period (seven years for interstate air couriers and eligible
major industries), the taxpayer forfeits the longer carryforward period.
- Advisory Ruling (G.S. 105-129.4(g))
A taxpayer may request in writing from the Secretary of Revenue specific
advice regarding eligibility for a credit. G.S. 105-264 governs the effect
of this advice.
- Statute of Limitations (G.S. 105-129.5(d))
A taxpayer must claim a credit within six months after the date set
by statute for the filing of the return that coincides with the year that
the taxpayer qualified for the credit, including any extensions of that
date. The following example illustrates this requirement:
A calendar year taxpayer creates 10 new qualifying jobs in
2003. The taxpayer files a timely extension on March 15, 2004, which extends
the due date of the tax return to October 15, 2004. Applying the six-month
statute of limitations, the taxpayer has until April 15, 2005 to file
the NC-478A and report the 2003 credit for creating jobs. If the taxpayer
had not filed a timely extension by March 15, 2004, the NC-478A would
have had to be filed by September 15, 2004.
- Fees (G.S. 105-129.6)
A fee of $500.00 is required for each credit the taxpayer intends to claim
with respect to a location that is in an enterprise tier three, four, or
five area, subject to a maximum fee of $1,500.00. There is no fee for a
credit in an enterprise tier one or tier two area. There is also no fee
for a credit with respect to a location that is in a development zone. If
the taxpayer intends to claim a credit that relates to locations in more
than one enterprise tier area, the fee is based on the highest-numbered
enterprise tier area. The fee is due at the same time as the tax return
and the credit will not be allowed until the fee is paid.
- Forms
The Form NC-478 series is used to calculate and report tax credits, including
the Article 3A tax credits that are limited to 50% of the taxpayer's tax
less the sum of all other credits that the taxpayer claims. Forms NC-478A
through NC-478H are used to calculate the specific credits without regard
to the 50% limitation. Form NC-478 is used to total the specific credits,
to determine if the 50% limitation applies, and, if so, to allocate the
limited total credit among the specific credits. Form NC-478V is used to
report the fee that is due.
The table below lists the tax credits that are subject to the 50% of
tax limitation and the NC-478 series form on which the credit is reported.
The table also indicates if the credit is an Article 3A credit.
| Credit |
File Form NC-478 plus Form: |
Article 3A? |
| Creating Jobs |
NC-478A |
Yes |
| Investing in Machinery and Equipment |
NC-478B |
Yes |
| Research and Development |
NC-478C |
Yes |
| Worker Training |
NC-478D |
Yes |
| Investing in Central Office or Aircraft Facility Property |
NC-478E |
Yes |
Investing in Business Property
(SEE NOTE BELOW)
|
NC-478F |
No; in Art. 3B. |
| Investing in Renewable Energy Property |
NC-478G |
No; in Art. 3B. |
| Low-income Housing |
NC-478H |
No; in Art. 3E. |
| Contributing to Development Zone Projects |
No additional form. Use NC-478, line 11 |
Yes |
| Technology Commercialization |
No additional form. Use NC-478, line 9. |
Yes |
| Investing in Non-hazardous Dry-cleaning Equipment |
No additional form. Use NC-478, line 10. |
No; in Art. 3B. |
| Use of North Carolina Ports |
No additional form. Use NC-478, line 11. |
No; in Art. 4. |
| Renewable Energy Equipment Facility - Article 4 |
No additional form. Use NC-478, line, 11 |
No; in Art. 4. |
| Manufacturing Cigarettes for Export |
No additional form. Use NC-478, line, 11 |
No; in Art. 4. |
Note: The Investing in Business Property credit expired for investments
made after December 31, 2001; remaining installments and carryforwards may
still be taken.
Both Form NC-478 and any applicable Form NC-478 series form must be filed
for any taxable year in which the taxpayer is eligible to claim a credit
or an installment of a credit against the taxpayer's tax liability for that
year. This requirement applies even if the taxpayer's tax liability for
that year is not large enough for the taxpayer to benefit from the credit.
If the taxpayer engages in activities that qualify for the credit for creating
jobs, the credit for investing in machinery and equipment, or the credit
for investing in central office or aircraft facility property, the taxpayer
must complete Part 1 of Form NC-478A, Form NC-478B, or Form NC-478E and
file the form with the taxpayer's return for the taxable year in which the
taxpayer engages in the activity, even though the first installment of the
credit will not be claimed until the following year.
For further information about the Form NC-478 series, see Form NC-478 INST,
Instructions for 2003 Form NC-478 Series.
XV. CREDIT FOR CREATING JOBS (G.S. 105-129.8)
- Eligibility
To be eligible for a credit for creating jobs, a taxpayer must meet the
following conditions:
- Meet all general eligibility requirements described in Section V.
- Have five or more full-time employees.
- Hire an additional full-time employee during the year to fill a position
located in this State.
- Terms Used
Creating a new full-time job. -- A taxpayer creates a new full-time job
if the taxpayer has an additional full-time employee in this State at the
end of the current tax year when compared to the end of the previous year.
Full-time job. -- A position that requires at least 1,600 hours of work
per year and is intended to be held by one employee during the entire year.
Location of a job. -- A job is located in an area if more than fifty percent
of the employee's duties are performed in the area.
- Credit Amount
The amount of credit allowed is based upon the enterprise tier of the
area in which the position is located as shown below:
| Area Enterprise Tier |
Amount of Credit for Each Job |
| Tier One |
$12,500 |
| Tier Two |
4,000 |
| Tier Three |
3,000 |
| Tier Four |
1,000 |
| Tier Five |
500 |
| Development Zone in Any Tier |
$4,000 plus the amount for the Tier |
- Taking the Credit
The credit is taken in four equal installments over the four-year period
beginning the year after the taxpayer qualifies for the credit. If a taxpayer
is required to file more than one tax return during a year, each return
constitutes a year for purposes of taking installments of the credit.
- Expiration
If, in one of the four years in which an installment accrues, the number
of the taxpayer's full-time employees falls below the number of full-time
employees the taxpayer had in the year in which the taxpayer qualified for
the credit, the credit expires and the taxpayer may not take any remaining
installments of the credit. This calculation is illustrated by the following
example:
Taxpayer is claiming a credit for forty jobs in tier 4 at $1,000 per
job. The installments are $10,000 each over four years. During the year
that the third installment of the credit accrues, the taxpayer loses
twelve jobs. The third and fourth installments must be recalculated
to recognize the loss of the jobs. After the recalculation, the third
and fourth installments that remain to be taken are $7,000 each, rather
than $10,000 each, computed as follows:
(40 - 12) x $1,000
4
If the taxpayer has carryforwards from the first and second installments
attributable to the 12 lost jobs, the taxpayer can continue to take
the carryforwards for these even though the installments have expired.
When a credit expires, the taxpayer can still take the portion of an
installment that accrued in a previous year and was carried forward.
- Movement of Jobs
Jobs transferred from one area in the State to another area are not
considered new jobs. If a job qualifies for the credit in one tier, but
is moved to another enterprise tier, the credit is recomputed as if the
job had been created initially in the area to which it was moved.
- Planned Expansion
A taxpayer that signs a letter of commitment with the Department of
Commerce to create at least 20 new full-time jobs in a specific area within
two years (seven years for interstate air couriers and, effective for taxable
years beginning on or after January 1, 2004, eligible major industries)
of the date the letter is signed qualifies for the credit in the amount
allowed based on the area's enterprise tier and development zone designation
for that year even though the employees are not hired that year. The credit
is available in the taxable year after at least 20 employees have been hired
if the hirings are within the two-year (seven years for interstate air couriers
and, effective for taxable years beginning on or after January 1, 2004,
eligible major industries) commitment period. If the taxpayer does not hire
the employees within the two-year (seven years for interstate air couriers)
period, the taxpayer does not get the benefit of the letter of commitment.
Note: Any taxpayer who signed a letter of commitment by February 28, 2002
is entitled to the 2001 tier designation instead of the 2002 designation.
XVI. CREDIT FOR INVESTING IN MACHINERY AND EQUIPMENT
(G.S. 105-129.9)
- Eligibility
To be eligible for a credit for investing in machinery and equipment, a
taxpayer must:
- Meet all general eligibility requirements described in “General
Eligibility Requirements.”
- Purchase or lease eligible machinery and equipment.
- Place the eligible machinery and equipment in service during the taxable
year.
- Terms Used
Cost. -- In the case of property owned by the taxpayer, cost
is determined pursuant to regulations adopted under section 1012 of the
Internal Revenue Code. In the case of property the taxpayer leases from
another, cost is valued at eight times the net annual rental rate as described
in G.S. 105-130.4(j)(2).
Eligible machinery and equipment (G.S. 105-129.2(10)). -- Machinery
and equipment are eligible if they are capitalized by the taxpayer for tax
purposes under the Internal Revenue Code and are not leased to another party.
Property expensed under Section 179 of the Code is not eligible. In the
case of a qualifying large investment, machinery and equipment that are
not capitalized by the taxpayer are eligible if the taxpayer leases them
from another party.
Machinery and equipment. -- Engines, machinery, equipment, tools, and
implements used or designed to be used in the business for which the credit
is claimed. The term does not include real property as defined in G.S.
105-273 or rolling stock as defined in G.S. 105-333.
- Credit Amount
The credit is 7% of the excess of the eligible investment amount over
the applicable threshold if the investment is placed in service in a tier
one or tier two area, 6% for tier three, 5% for tier four, and 4% for tier
five. Business activities subject to a letter of commitment applied for
before January 1, 2003, qualify for a 7% credit regardless of the tier in
which the investment is placed in service.
The eligible investment amount is the lesser of the following:
- The cost of the machinery and equipment.
- The amount by which the cost of all of the taxpayer's machinery and
equipment that is in service in North Carolina on the last day of the
taxable year exceeds the cost of all of the taxpayer's machinery and
equipment that was in service in North Carolina on the last day of the
base year. The base year is that year, of the three immediately preceding
taxable years, in which the taxpayer had the most machinery and equipment
in service in North Carolina.
The threshold is based on the enterprise tier of the area where the machinery
and equipment are placed in service during the taxable year. Thresholds
for Tier One through Tier Five are as follows:
| Enterprise Tier Area |
Threshold |
| Tier One |
$-0- |
| Tier Two |
100,000 |
| Tier Three |
200,000 |
| Tier Four |
1,000,000 |
| Tier Five |
2,000,000 |
For business activities subject to a letter of commitment applied for before
January 1, 2003, the threshold in tier four is $500,000 and the threshold
in tier five is $1,000,000 If the taxpayer places eligible machinery and
equipment in service in an area over the course of a two-year period, the
applicable threshold for the second taxable year is reduced by the eligible
investment amount for the previous taxable year.
If machinery and equipment are placed in service at two or more establishments
within the same tier during the taxable year, the threshold must be applied
to each establishment.
- Taking the Credit
The credit is taken in seven equal installments beginning the year after
the taxpayer qualifies for the credit. If a taxpayer is required to file
more than one tax return during a year, each return constitutes a year for
purposes of taking installments of the credit.
- Expiration
Generally, if machinery and equipment are disposed of, taken out of service,
or moved out of North Carolina prior to the end of the seven-year period
in which the credit is claimed, the amount of credit that relates to the
machinery and equipment no longer in service expires and a taxpayer may
not take any remaining installment related to this machinery and equipment.
However, a taxpayer that replaces or otherwise disposes of machinery and
equipment for which a credit was claimed can continue to take the remaining
installments of the credit that relate to the machinery and equipment no
longer in service if the net reduction in the cost of the taxpayer's eligible
machinery and equipment in the enterprise tier does not exceed 20% of the
cost of the disposed property. If the net reduction exceeds 20%, the remaining
installments of the credit expire. If during a single tax year the taxpayer
disposes of machinery and equipment with respect to two or more credits
in the same tier, costs are calculated based on all credits affected.
The "net investment reduction" calculation is illustrated by the
following example:
- Taxpayer has $10,000,000 of eligible machinery and equipment in service
in Tier 1.
- During the tax year, a piece of equipment with a cost of $2,500,000
is taken out of service.
- There are remaining installments of a credit related to the equipment
taken out of service.
- Replacement equipment is placed into service during the same tax year
at a cost of $1,500,000.
- Total cost of eligible equipment at the end of the tax year is $9,000,000.
The net investment reduction in Tier 1 is $1,000,000 ($10 million - $9 million).
Twenty percent of the cost of the equipment taken out of service is $500,000
($2,500,000 x .20). The net reduction in total eligible equipment ($1 million)
is greater than 20% of the cost of the equipment taken out of service ($500,000).
Therefore, the installments related to the $2,500,000 piece of equipment
expire.
If a taxpayer disposes of a portion of the machinery and equipment for
which a credit is claimed, and the taxpayer is not entitled to continue
taking the installments of the credit in accordance with the "net
investment reduction" calculation illustrated above, the amount of
the credit associated with the machinery and equipment no longer in service
expires. This calculation is illustrated by the following example:
- Taxpayer has $10,000,000 of eligible machinery and equipment in service
in tier 1 where the threshold is $0.
- Taxpayer is claiming a credit of $700,000 at $100,000 per installment
based on its $10,000,000 investment.
- During the year that the third installment of the credit accrues,
a piece of equipment for which the credit is claimed with a cost of
$2,500,000 is taken out of service.
The remaining installments beginning in year three are $75,000 each,
computed as follows:
$10,000,000 - $2,500,000 x .07
7
When a credit expires, a taxpayer can still take a portion of an installment
that is related to the machinery and equipment no longer in service and
accrued in a previous year and was carried forward.
- Movement to Higher Tier (G.S. 105-129.9(d))
If machinery and equipment for which a credit has been claimed is later
moved to a higher-numbered tier, the credit is recomputed as if the machinery
and equipment had been placed originally in the area to which it was moved.
- Planned Expansion (G.S. 105-129.9(e))
A taxpayer that signs a letter of commitment with the Department of
Commerce to place specific eligible machinery and equipment in service in
an area within two years (seven years for interstate air couriers and, effective
for taxable years beginning on or after January 1, 2004, eligible major
industries) after the date the letter is signed may, in the year the eligible
machinery and equipment are placed in service in that area, calculate the
credit for which the taxpayer qualifies based on the area's enterprise tier
and development zone designation for the year the letter was signed. If
the taxpayer does not place part or all of the specified eligible machinery
and equipment in service within the two-year period (seven years for interstate
air couriers and, effective for taxable years beginning on or after January
1, 2004, eligible major industries) the taxpayer does not qualify for the
benefit of the letter of commitment with respect to the machinery and equipment
not placed in service within the two-year period (seven years for interstate
air couriers and, effective for taxable years beginning on or after January
1, 2004, eligible major industries).
XVII. CREDIT FOR TECHNOLOGY COMMERCIALIZATION
(G.S. 105-129.9A)
The credit for technology commercialization is similar to the credit for investing
in machinery and equipment, but with higher rates of credit, and with more difficult
eligibility requirements. Consequently, except as provided in this section,
the provisions that apply to the credit for investing in machinery and equipment
also apply to the technology commercialization credit. A taxpayer cannot take
the machinery and equipment credit and the technology commercialization credit
with respect to the same asset.
- Eligibility
To be eligible for a technology commercialization credit, the taxpayer must
meet all of the requirements for the credit for investing in machinery and
equipment. In addition, the taxpayer must meet all of the conditions listed
below:
- The eligible machinery and equipment must be directly related to production
based on technology developed by and licensed from a research university;
or be used to produce resources essential to the taxpayer's production
based on technology developed by and licensed from a research university.
- The eligible machinery and equipment must be placed in service in
a tier one, two, or three enterprise area.
- The eligible investment amount must be at least $10,000,000 for the
taxable year.
- If qualifying for a 20% credit, the taxpayer must invest at least
$150 million in eligible machinery and equipment by the end of the fourth
year after the year in which eligible machinery and equipment are first
placed in service in the area.
- If qualifying for a 15% credit, the taxpayer must invest at least
$100 million in eligible machinery and equipment by the end of the fourth
year after the year in which eligible machinery and equipment are first
placed in service in the area.
- No more than nine years has passed since the first taxable year the
taxpayer claimed a technology commercialization credit with respect
to the same location.
- Terms Used
Eligible machinery and equipment. -- Unlike the requirement for the
credit for investing in machinery and equipment, a leased piece of machinery
and equipment does not have to be capitalized in order to be "eligible"
for this credit.
Research university. -- An institution of higher education classified
as a Research I university or a Research II university in the most recent
edition of "A Classification of Institutions of Higher Education,"
the official report of The Carnegie Foundation for the Advancement of
Teaching.
- Credit Amount
The credit is a percentage of the excess of the eligible investment
amount over the applicable threshold for the tax year. For a taxpayer whose
level of investment is at least $100 million, the percentage is 15%. If
the level of investment is at least $150 million, the percentage is 20%.
In calculating the eligible investment amount, machinery and equipment
that were transferred to another taxpayer or were taken out of service
during the three years preceding the tax year may be considered the taxpayer's
machinery and equipment if certain conditions are met. See G.S. 105-129.9A(b)
for the conditions. If the taxpayer wants to include machinery and equipment
under the exception in G.S. 105-129.9A(b)(2), the taxpayer must first
request a ruling by the Department of Revenue as to whether the taxpayer
meets the conditions.
- Taking the Credit
The credit is taken for the taxable year in which the machinery and equipment
are placed in service. The credit is not taken in installments.
XVIII. CREDIT FOR RESEARCH AND DEVELOPMENT
(G.S. 105-129.10)
- Eligibility
To be eligible for a credit for research and development, a taxpayer must:
- Meet all general eligibility requirements described in “General
Eligibility Requirements.”
- Claim for the taxable year the federal income tax credit for research
and development under section 41(a) or section 41(c)(4) of the Internal
Revenue Code.
Special Rules:
- If the primary activity of an establishment of the taxpayer in this
State is computer services, the taxpayer’s qualified research expenditures
in this State are considered to be used in computer services.
- For all other taxpayers, the taxpayer’s qualified research expenditures
in this State are considered to be used in the primary business of the
taxpayer.
- Terms Used
Base amount and qualified research expenses. -- Defined under section
41 of the Code.
Code.-- The Internal Revenue Code enacted as of January 1, 1999.
- Credit Amount
General Research and Development Credit
A taxpayer that claims for the taxable year a federal income tax
credit under section 41(a) of the Code for increasing research activities
is allowed a credit of 5% of the State's apportioned share of the taxpayer's
expenditures for increasing research activities. The State's apportioned
share of a taxpayer's expenditures for increasing research activities is
the excess of the taxpayer's qualified research expenses for the taxable
year over the base amount, multiplied by a percentage equal to the ratio
of the taxpayer's qualified research expenses in this State for the taxable
year to the taxpayer's total qualified research expenses for the taxable
year.
Alternative Research and Development Credit
A taxpayer that claims the alternative incremental credit under
section 41(c)(4) of the Code for increasing research activities is allowed
a credit equal to 25% of the State's apportioned share of the federal credit
claimed. The State's apportioned share of the federal credit claimed is
the amount of the alternative incremental credit the taxpayer claimed under
section 41(c)(4) of the Code for the taxable year multiplied by a percentage
equal to the ratio of the taxpayer's qualified research expenses in this
State for the taxable year to the taxpayer's total qualified research expenses
for the taxable year. The amount of the alternative incremental credit claimed
by a taxpayer is determined without regard to any reduction elected under
section 280C(c) of the Code.
- Taking the Credit
The credit is taken for the taxable year in which the taxpayer qualifies
for the credit. The credit is not taken in installments.
XIX. CREDIT FOR WORKER TRAINING (G.S. 105-129.11)
- Eligibility
To be eligible for a credit for worker training, a taxpayer must:
- Meet all general eligibility requirements described in “General
Eligibility Requirements” except for the wage standard test.
- Provide worker training for five or more of its eligible employees during
the taxable year.
- Terms Used
Eligible employee. -- An employee who is in a full-time position classified
as non-exempt under the Fair Labor Standards Act and who meets one or more
of the following conditions:
- The employee occupies a job for which the taxpayer is eligible to
claim an installment of the credit for creating jobs.
- The employee is being trained to operate machinery and equipment
for which the taxpayer is eligible to claim an installment of the credit
for investing in machinery and equipment.
Location of a job. -- A job is located in an area if more than 50% of the
employee's duties are performed in the area.
- Credit Amount
The credit is equal to the wages paid to the eligible employees
during the training. Wages paid to an employee performing his or her job
while being trained are not eligible for the credit. For positions located
in an enterprise tier one area, the credit may not exceed $1,000 per employee
trained during the taxable year. For positions located in other tiers, the
credit may not exceed $500 per employee trained during the taxable year.
- Taking the Credit
The credit is taken during the taxable year the wages are paid to the eligible
employees during training. The credit is not taken in installments.
XX. CREDIT FOR INVESTING IN CENTRAL OFFICE OR AIRCRAFT
FACILITY PROPERTY (G.S. 105-129.12)
- Eligibility
To be eligible for the credit, a taxpayer must:
- Meet all of the general eligibility requirements described in “General
Eligibility Requirements.”
- Purchase or lease real property in North Carolina.
- Begin to use the property as a central office or an aircraft facility
during the taxable year.
- Terms Used
Cost. -- In the case of property owned by the taxpayer, cost is determined
pursuant to regulations adopted under section 1012 of the Code. In the case
of leased property, cost is considered to be the taxpayer's lease payments
over a seven-year period, plus any expenditures made by the taxpayer to
improve the property before it is used as the taxpayer's central office
or aircraft facility if the expenditures are not reimbursed or credited
by the lessor.
- Credit Amount
The credit is 7% of the eligible investment amount. The eligible
investment amount is the lesser of the following:
- The cost of the property.
- The amount by which the cost of all the property the taxpayer is using
in North Carolina as central offices or aircraft facilities on the last
day of the taxable year exceeds the cost of all the property the taxpayer
was using in North Carolina as central offices or aircraft facilities
on the last day of the base year. The base year is that year, of the
three immediately preceding taxable years, in which the taxpayer was
using the most property in North Carolina as central offices or aircraft
facilities.
The maximum credit is $500,000 per taxpayer. The basis in any real property
for which a credit is allowed must be reduced by the amount of credit allowable.
- Mixed Use Property
If the property is used for more than one purpose, the credit is allowed
only with respect to the portion of the property that is used as a central
office or aircraft facility. This determination is made using the following
fraction:
square footage of the property used as central office or aircraft facility
total
square footage of the property
- Taking the Credit
The credit is taken in seven equal installments beginning the year after
the taxpayer qualifies for the credit. If a taxpayer is required to file
more than one tax return during a year, each return constitutes a year for
purposes of taking installments of the credit.
- Expiration
The credit expires in the following circumstances:
- When the property for which the credit is claimed is no longer used
as a central office or an aircraft facility.
- When the total number of employees the taxpayer employs at all of
its central offices or aircraft facilities in North Carolina drops below
40.
- When a portion of the property for which the credit is claimed is
no longer used as a central office or an aircraft facility. In this
circumstance, the amount of the credit associated with the portion no
longer used as a central office or an aircraft facility expires. The
remaining installments are computed by multiplying the total credit
times the fraction described above for mixed-use property.
When a credit expires, the taxpayer can still take the portion of an installment
that accrued in a previous year and was carried forward.
XXI. CREDIT FOR SUBSTANTIAL INVESMENT IN OTHER
PROPERTY (G.S. 105-129.12A)
- Eligibility
To be eligible for the credit, the taxpayer must receive a written determination
from the Secretary of Commerce that the Secretary expects the taxpayer to
purchase or lease and use in an eligible business at a specific location
within a three-year period at least $10,000,000 of real property, and to
create 200 new jobs at that location within two years of the time that the
property is first used in an eligible business. This requirement is set
out in G.S. 105-129.4(b5). Additionally, the taxpayer must meet all of the
eligibility requirements listed below:
- Meet all of the general eligibility requirements described in “General
Eligibility Requirements.”
- Purchase or lease real property in an enterprise tier one or two area.
- Begin to use the property in an eligible business during the taxable
year.
- Terms Used
Cost. -- In the case of property owned by the taxpayer, cost is determined
pursuant to regulations adopted under section 1012 of the Internal Revenue
Code. In the case of leased property, cost is considered to be the taxpayer's
lease payments over a seven-year period, plus any expenditures made by the
taxpayer to improve the property before the taxpayer uses it if the expenditures
are not reimbursed or credited by the lessor.
Property located in an enterprise tier one or two area. -- Property is located
in an enterprise tier one or two area if the area is designated as tier
one or two at the time the taxpayer requests the required written determination
from the Secretary of Commerce regarding its expected investment.
- Credit Amount
The credit is 30% of the eligible investment amount. The eligible
investment amount is the lesser of the following:
- The cost of the property.
- The amount by which the cost of all of the real property the taxpayer
is using in this State in an eligible business on the last day of the
taxable year exceeds the cost of all of the real property the taxpayer
was using in this State in an eligible business on the last day of the
base year. The base year is that year, of the three immediately preceding
taxable years, in which the taxpayer was using the most real property
in this State in an eligible business.
When an investment is phased in over the course of more than one tax year,
the taxpayer may claim a credit in each year based on the eligible investment
amount of the property that is first used in an eligible business for the
current tax year. The basis in any real property for which a credit is allowed
must be reduced by the amount of credit allowable.
- Mixed Use Property
If the property is used for more than one purpose, the credit is allowed
only with respect to the portion of the property that is used as a central
office or aircraft facility. This determination is made using the following
fraction:
square footage of the property used as central office or aircraft facility
total
square footage of the property
- Taking the Credit
The credit is taken in seven equal installments beginning the year after
the taxpayer qualifies for the credit. If a taxpayer is required to file
more than one tax return during a year, each return constitutes a year for
purposes of taking installments of the credit.
- Expiration
The credit expires in the following circumstances:
- When the property for which the credit is claimed is no longer used
in an eligible business.
- When the total number of employees at the property with respect to
which the credit is claimed drops below 200.
- When a portion of the property for which the credit is claimed is
no longer used in an eligible business. In this circumstance, only the
amount of the credit associated with the portion no longer used in an
eligible business expires. The remaining installments are computed by
multiplying the total credit times the fraction described above for
mixed-use property.
- When a credit expires, the taxpayer may not take any remaining installments
of the credit. The taxpayer can still take the portion of an installment
that accrued in a previous year and was carried forward.
XXII. CREDIT FOR DEVELOPMENT ZONE PROJECTS (G.S.
105-129.13)
- Eligibility
The general eligibility requirements do not apply to this credit. To be
eligible for a credit for a development zone project, the taxpayer must
meet the following requirements:
- Contribute cash or property to a development zone agency for an improvement
project in a development zone.
- Not control, be controlled by, or be under common control with an affiliate
of the development zone agency. The taxpayer may not have one of the relationships
defined in section 267(b) of the Internal Revenue Code with the development
zone agency.
- File an application with the Department of Revenue on or before April
15 of the year following the calendar year in which the contribution was
made. The Secretary may grant an extension for filing the application
if a taxpayer makes a timely request for an extension. An extension allows
the taxpayer to file the application by the following September 15.
- Include with an application submitted a certified appraisal of the
value of the property contributed, if the contribution was of property
rather than cash.
- Terms Used
Control. -- A person controls an entity if the person owns, directly
or indirectly, more than 10% of the voting securities of that entity. The
term "voting security" means a security that confers upon the
holder the right to vote for the election of members of the board of directors
or similar governing body of the business or is convertible into, or entitles
the holder to receive upon its exercise, a security that confers such a
right to vote. A general partnership interest is a voting security.
Development zone agency. -- Any of the following agencies that the Department
of Commerce certifies will undertake an improvement project in a development
zone will qualify:
- A community-based development organization qualified under 24 C.F.R.
section 570.204.
- A community action agency that has been officially designated as such
pursuant to section 210 of the Economic Act of 1964, Public Law 88-452,
78 Stat. 508.
- A community development corporation.
- A community development financial institution certified by the United
States Department of the Treasury under the Community Development Banking
and Financial Institutions Act of 1994, 12 U.S.C. section 4701.
- A community housing development organization qualified under the HOME
Investment Partnerships Act, 42 U.S.C. section 12701 and 12704, and
24 C.F.R. section 92.2.
- A local housing authority created under Article 1 of Chapter 157 of
the General Statutes.
Improvement project. -- A project to construct or improve real property
for community development purposes or to acquire real property and convert
it for community development purposes. Construction or improvement includes
services provided by a development zone agency directly related to the construction
or improvement, and project development fees charged by a developer for
the construction or improvement.
- Credit Amount
The credit is equal to 25% of the value of the contribution
of cash or property to a development zone agency for an improvement project
in a development zone. A contribution is for an improvement project if the
agency receiving the contribution contracts in writing to use the contribution
for the project and agrees in the contract to repay to the taxpayer, with
interest, any part of the contribution not used for the project.
- Taking the Credit
The credit may not be taken in the year in which the contribution is made.
Instead, the credit must be taken for the taxable year beginning during
the calendar year in which the application to the Department of Revenue
for the credit becomes effective.
- Ceiling
The total amount of all credits for contributions made in a calendar year
may not exceed $4,000,000. If the total amount of credits claimed exceeds
$4,000,000, the Secretary of Revenue must allocate the $4,000,000 in tax
credits in proportion to the size of the credit claimed by each taxpayer.
If a credit is reduced because of this ceiling, the Secretary must notify
the taxpayer of the amount of the reduction of the credit on or before December
31 of the year the application was filed.
- Forfeiture
A taxpayer forfeits the credit to the extent the development zone agency
uses the taxpayer's contribution for any purpose other than an improvement
project.
Last modified on:
10/31/07 03:53:02 PM
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