(See Regulation Section 17053.49-0 for Table of Contents.)
(a)In General. The MIC shall not be allowed or shall be recaptured under the rules of this regulation in any case where a disposition occurs within one year or less of the date the qualified property is first placed in service in this state.(b)Disposition. For purposes of this regulation, the term "disposition" shall include any of the following events: (1) Removal of the qualified property from this state;(2) Disposition of the qualified property to any party that is not a related party (as defined in Internal Revenue Code Sections 267, 318 or 707), whether by sale, gift, a transfer upon the foreclosure of a security interest, or otherwise;(3) Use of the qualified property by the qualified taxpayer primarily in any non-qualified activity; or(4) Acquisition by a lessee (or any party related to the lessee under Internal Revenue Code Sections 267 or 318) of qualified property that is being leased by such lessee. However the term "disposition" shall not include any of the following events:
A. a mere transfer of legal title to a creditor upon creation of a security interest;B. a transfer by a qualified taxpayer of legal title to qualified property to a lessor where the lessor is not treated as the tax owner of such property and the lease is properly characterized as a financing transaction under California income tax principles;C. any election by a C corporation to become an S corporation; orD. any destruction of qualified property which qualifies as an involuntary conversion under Section 1033 of the Internal Revenue Code.(c)Disposition of Qualified Property During the Taxable Year Placed in Service. In any case where there is a disposition of qualified property during the same taxable year in which such qualified property is first placed in service in this state, no MIC shall be allowed to the qualified taxpayer for the taxable year in which the qualified property is placed in service. EXAMPLE: H, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On March 1, 1996, H pays $700 (plus California sales tax) for 10 personal computers and immediately places the computers in service in H's manufacturing facility in Sunnyvale. On September 1, 1996, H acquires 10 new computers (which are immediately placed in service in H's manufacturing facility) for $800 (plus California sales tax) to replace the 10 computers already in service, and H instead uses the old computers to perform general administrative functions such as payroll and marketing. Under these facts, when H files its California tax return for its taxable year ending September 30, 1996, H is not entitled to claim the MIC for the 10 personal computers acquired on March 1, 1996, because the computers are treated as having been disposed of during the same taxable year as they were placed in service as a result of H's use of these computers in an activity that is not a qualified activity. However, the 10 new computers acquired on September 1, 1996, may qualify for the MIC for H's taxable year ending September 30, 1996.
(d)Disposition of Qualified Property During a Taxable Year Subsequent to the Taxable Year Placed In Service. In any case where there is a disposition of qualified property within one year of the date that such qualified property is first placed in service in this state, but such disposition occurs in a different taxable year than the year in which the qualified property is placed in service in this state, then any MIC that was allowed with respect to the qualified property shall be recaptured by adding the recaptured MIC to the tax of the qualified taxpayer for the taxable year during which the disposition occurs (except as provided in subsection (e) of this regulation). EXAMPLE: F, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On August 15, 1996, F acquires 20 new computers for $600 (plus California sales tax) and immediately places the computers in service in H's manufacturing facility in Glendora. On May 15, 1997, F removes the 20 computers from F's manufacturing facility in Glendora and transports them for use in F's New Mexico manufacturing facility. Assuming F had been allowed a MIC on its taxable year ending September 30, 1996, California tax return for the computers acquired on August 15, 1996, F must recapture the entire MIC allowed by adding such amount to F's tax for its taxable year ending September 30, 1997.
(e)Adjustment of Carryforwards when Disposition Occurs. In any case where a qualified taxpayer is required to recapture any previously allowed MIC under the rules of this regulation, then, prior to the addition of any recaptured amounts to the tax under subsection (d) of this regulation, any outstanding MIC carryforwards shall first be reduced to the extent necessary to fully absorb the recapture amount. Any recapture amount remaining after application of the preceding sentence shall be added to the tax under the rules of subsection (d) of this regulation. EXAMPLE 1: On May 1, 1999, within one year of placing qualified property in service in this state, K disposes of qualified property for which a $150 MIC was previously allowed. Under the rules of this regulation, K is required to recapture the entire $150 MIC. Assume K had $400 in MIC carryforwards that were available for use in 1999. Under these facts, K would reduce its available MIC carryforwards to $250 ($400 minus $150). Since no additional recapture amount remains, K is not required to increase its tax for 1999 to reflect the $150 recapture amount.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of $400 in available MIC carryforwards, K had only $100 in available MIC carryforwards. Under these facts, K would first reduce its available MIC carryforwards to zero, and would then increase its tax for 1999 by $50 ($150 recapture amount less $100 used to reduce available MIC carryforwards).
(f)Recapture of MIC Allowed to Pass-Through Entities. (1)Partnerships and Partners. If a partnership places qualified property in service in this state, claims the MIC to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the property for a purpose not qualifying for the MIC, then the MIC shall be recaptured under Revenue and Taxation Code Section 17053.49(g) and this regulation. The amount of MIC subject to recapture shall be allocated among the partners in the same ratio that the MIC was allocable to each partner for the qualified property subject to the recapture, and shall be added to the "net tax" of the partner for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use. EXAMPLE 1: Assume that C and D are equal partners of M, a partnership that is a qualified taxpayer. During M's taxable year beginning in 1995, M is allowed a total MIC of $100. C and D each are able to utilize their entire 50% share of the 1995 MIC to offset their respective 1995 tax liabilities, so that there is no MIC carryover amount for either C or D. Assume further that in 1996, within one year of the date the qualified property was placed in service, M moves the qualified property to another state, thereby triggering a recapture of the MIC. C and D are required to recapture their distributive share of the MIC already applied to their respective 1995 tax liabilities on their respective 1996 California tax returns by adding the recaptured MIC amounts to their respective "net tax" for 1996.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C uses all of C's share of the MIC to reduce C's 1995 tax liability, but D carries over all of D's MIC to 1996. On C's 1996 California tax return, C will be required to recapture C's share of the MIC that was used to reduce C's "net tax" for 1995 and D will be required to reduce its MIC carryover to zero. D will not be required to increase D's "net tax" for 1996 by the amount of D's share of the MIC because D was unable to apply the amount to reduce D's tax liability for 1995.
(2)S Corporations and Shareholders.A.Corporate Level Recapture. If an S corporation places qualified property in service in this state, claims the MIC to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the qualified property for a purpose not qualifying for the MIC, then the MIC shall be recaptured under Revenue and Taxation Code Section 17053.49(g) and this regulation. The amount of any MIC recaptured by the S corporation shall be added to the "tax" of the S corporation imposed under Chapter 4.5 of Part 11 of the Revenue and Taxation Code, except that the MIC recapture amount added to the "tax" of the S corporation shall be appropriately reduced by the amount by which the S corporation was required to reduce such MIC under Part 11 of the Revenue and Taxation Code.B.Pass-through of MIC Recapture to Shareholders. In any case where a "disposition" of qualified property by an S corporation occurs, the amount of MIC subject to recapture shall be allocated among the shareholders of the S corporation in the same ratio that the MIC was allocable to each shareholder for the qualified property subject to the recapture, and shall be added to the "net tax" of the shareholder for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use. EXAMPLE: Assume that Q, an S corporation with three equal shareholders (E, F, and G), is allowed a MIC in 1995 that Q is fully able to utilize to reduce Q's 1.5% S corporation tax liability. Assume further that E, F, and G each claims a one-third ( 1/3) share of the MIC allowed to Q, and that each shareholder is able to utilize their entire distributive share of this MIC on their respective 1995 California tax returns. In 1996, within one year of the date the qualified property was placed in service in California, Q sells the property to an unrelated party. Under these facts, Q, E, F, and G must each recapture the MIC allowed and claimed by each on their respective 1995 California tax returns by adding such recapture amount to their 1996 respective California "tax" or "net tax," as the case may be.
(g)Recapture of MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Taxable Year Beginning on or after January 1, 1995. In the case of any qualified costs paid or incurred with respect to qualified property that is placed in service in 1994 or 1995 for which the MIC is allowed but deferred under the rules of subsection (b) of Regulation 17053.49-1, the one year period for which any disposition of such property shall trigger recapture of the MIC (as described in subsection (a) of this regulation) shall commence on the date that the qualified property is first treated as placed in service in this state by the qualified taxpayer. Any MIC required to be deferred under the rules of subsection (b) of Regulation 17053.49-1 shall be first offset against any MIC recapture amount (in the same manner as MIC carryforwards are offset under the rules of subsection (e) of this regulation) prior to being claimed on the qualified taxpayer's California tax return for its first taxable year beginning on or after January 1, 1995. EXAMPLE 1: D, a qualified taxpayer, pays or incurs qualified costs for qualified property that is placed in service in this state on June 1, 1994. However, under subsection (b) of Regulation 17053.49-1, D may not claim the MIC for these qualified costs until D files its California tax return for D's first calendar or fiscal year beginning on or after January 1, 1995. On May 1, 1995, D removes the qualified property to Nevada, thereby triggering a recapture of the MIC allowed to D for its 1994 qualified costs. When D files its calendar year 1995 California tax return on March 15, 1996, D may not claim the MIC with respect to the qualified property D placed in service on June 1, 1994.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that D instead removes the qualified property to Nevada on June 2, 1995. In this situation, no recapture is triggered by the removal because the disposition occurs more than one year after the property was placed in service in this state by D.
Cal. Code Regs. Tit. 18, §§ 17053.49-8
1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18). Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).