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New California Manufacturing Tax Credit; Capital Incentive Program Revised


9/5/14

Recent legislation enacted by the State of California provides manufacturers of new advanced strategic aircrafts with a tax credit for qualified wages. The legislation revises the capital investment incentive program under which local governments may rebate to a qualified manufacturer an amount equal to property taxes on qualified manufacturing facilities in the locality.

Understanding the New Credit

Approved by the Governor on July 10, 2014, the legislation provides a new credit, for taxable years beginning on or after January 1, 2015, for qualified wages paid or incurred by a manufacturer of advanced strategic aircrafts. The credit is equal to 17.5% of qualified full-time employee wages paid or incurred during the tax year and is scheduled to expire on January 1, 2030. If the amount of the credit exceeds a taxpayer’s tax liability, the excess may be carried over to reduce tax due in the following year and the seven succeeding years. If a taxpayer receives the California Competes tax credit, the aggregate amount will be reduced by the phased aggregate amount of this new credit.

In order to qualify for the credit, manufacturers must be a prime or first-tier subcontractor awarded a contract to manufacture property for ultimate use in or as a component of a new advanced strategic aircraft for the U.S. Air Force. The aggregate amount of the credit allowed to all qualified taxpayers is $25 million annually for taxable years 2015 to 2020, $28 million annually for taxable years 2020 to 2025, and $31 million annually for taxable years 2025 to 2030. The Franchise Tax Board will allocate the credit on a first-come, first-served basis. Qualified wages are:

  • Paid to employees with at least 80% of their services directly related to the taxpayer’s subcontract work on new advanced strategic aircraft for the U.S. Air Force
  • Paid to salaried employees and hourly employees receiving wages for working an average of 35 hours a week or more

Changes to the Capital Incentive Program

The new legislation modifies the terms of the Capital Incentive Program permitting local governments to rebate, to certain large manufacturers, an amount equal to California property tax on qualified manufacturing facilities in the locality revenues. Until July 1, 2015, local governments can rebate California property tax revenues derived from the taxation of the assessed value in excess of $25 million of a “qualified manufacturing facility” in the local government’s jurisdiction. After July 1, 2015, and until its current date of repeal of January 1, 2018, the capital threshold investment amount will return to $150 million.

The definition of a “qualified manufacturing facility” has also been amended during the period ending June 30, 2015, to include facilities operated by certain businesses described in specified provisions of the North American Industry Classification System manual.

What Does CohnReznick Think?
Advanced strategic aircraft manufacturers who are eligible for the qualified wages paid credit should consider the benefits the credit has on reducing the company’s tax burden. However, it is also important that taxpayers understand the rules and regulations of qualifying for the credit and the associated deadline dates.

Contact

For more information, please contact Alan Wolfson, Partner and Manufacturing and Wholesale Distribution Industry Practice Leader, at 646-254-7416 or Krista Schipp, Senior Manager, State and Local Tax Practice, at 818-205-2616.

For information on CohnReznick’s Manufacturing and Distribution Industry Practice, please visit our website.


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This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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