N.J. Admin. Code § 18:7-3.21

Current through Register Vol. 56, No. 17, September 3, 2024

Section 18:7-3.21 - Manufacturing equipment and employment investment tax credit

(a) The following words and terms, as used in this section, shall have the following meanings unless the context clearly indicates otherwise:

"Base year" means the tax year immediately preceding the year in which a qualified investment was placed in service.

"Cost of qualified equipment" means, and is determined according to, the following criteria:

1. With respect to self-constructed equipment, the term means the cost amount properly charged to the capital account for depreciation in accordance with Federal income tax law. This includes all charges incurred to produce a particular manufacturing piece of equipment. Costs include engineering designs, drafting, and other consultations required, as well as the physical construction costs associated with the finished product.

2. With respect to purchased equipment, the term is determined to be the net cost or net monetary consideration provided for acquisition of title and/or ownership of the subject property.

3. With respect to equipment acquired by written lease, the term is the minimum amount required by the agreement to be paid over the term of the lease, provided that the minimum amount shall not include any amount required to be paid after the expiration of the useful life of the equipment. Property which a taxpayer leases, rents, or licenses to another person is not qualified equipment.

4. The cost of qualified equipment shall not include the value of equipment given in trade or exchange for the equipment purchased for business relocation or expansion.

"Credit allowable" means the credit available after applying limitations listed under (b)2i and ii below.

"Credit available" means the credit earned plus any unused carryover from prior years.

"Credit earned" means the manufacturing equipment portion of the credit plus the employment investment portion of the credit in a given tax year.

"Employee equivalents" means the aggregate hours of qualified part-time employees who worked for the taxpayer for at least 20 hours per week for at least six months. This amount is used to determine the total number of full-time employees and equivalents necessary when calculating the employment investment portion of the credit. The employees must be New Jersey residents domiciled in this State who are working at locations in New Jersey.

"Measurement year" means the tax year immediately following the year in which a qualified investment was placed in service.

"Placed in service," with respect to qualified equipment, means and occurs in the earlier of the following tax years:

1. The tax year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins; or

2. The tax year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.

"Qualified equipment" means machinery, apparatus, or equipment acquired by purchase for use or consumption by the taxpayer directly and primarily in the production of tangible personal property by manufacturing, processing, assembling, or refining, as defined pursuant to N.J.S.A. 54:32B-8.13a, having a useful life of four or more years, and placed in service in this State. Qualified equipment does not include tangible personal property which the taxpayer contracts or agrees to lease or rent to another person or licenses another person to use. Lease renewals, subleases, or assignments shall not be considered as qualified equipment. See N.J.A.C. 18:24-4.2.

"Useful life" used to distinguish three-year property from all other property, is determined in accordance with I.R.C. § 168.

(b) A corporate taxpayer that acquires qualified manufacturing equipment either by purchase or lease and/or has an increase in New Jersey employees due to the equipment investment is entitled to a corporation business tax credit.

1. The credit earned is subject to the following limitations:

i. The manufacturing equipment portion is limited to two percent of the cost of qualified equipment placed in service up to a maximum credit for the tax year of $ 1,000,000, provided that if a taxpayer has 50 or fewer employees (an average number of full-time employees and full-time employee equivalents of 50 or less) and entire net income to be used as a measure of the tax determined pursuant to 54:10A-6 of less than $ 5,000,000 for the tax year, the taxpayer shall be allowed a credit against the tax imposed pursuant to 54:10A-5 in an amount equal to four percent of the investment credit base of qualified equipment placed in service in the tax year, up to a maximum allowed credit for the tax year of $ 1,000,000.

ii. The employment investment portion is limited to three percent of the cost of qualified equipment, not to exceed a maximum allowed amount of $ 1,000 multiplied by the increase in the average number of qualified employees and/or employee equivalents. It is valid for each of the two tax years next succeeding the tax year for which the manufacturing equipment portion is allowed.

2. The two portions combined plus any carryover (the credit available) shall not reduce the tax liability below 50 percent of the tax liability otherwise due for any tax year or below the statutory minimum tax provided at N.J.S.A. 54:10A-5(e).

(c) If the total credit earned in the current or prior years is unused due to the limitations contained in (b)2i and ii above, the unused portion may be carried over to the seven tax years succeeding the year in which the credit was earned.

(d) The credit assigned to property that has been disposed of, or which ceases to be qualified equipment prior to the end of its categorized useful life, should be redetermined using the ratios specified below:

THREE-YEAR PROPERTY	ALL OTHER PROPERTY
Number of months qualified use	Number of months qualified use
36	60

(e) Property subject to lease agreements shall have a minimum term of four years with a maximum not to exceed 20 years to be considered qualified equipment.

(f) The following example illustrates the application of the credit:

Example:	Year 1	Year 2	Year 3	Year 4
Cost of qualified equipment placed in service	None	$ 3,000,000	$ 5,000,000	$ 1,000,000
Average employees and/or employee equivalents	125	140	150	160

Year 2: XYZ Corporation places qualified manufacturing equipment in service in New Jersey during Year 2. The cost of the manufacturing equipment, excluding shipping and installation, is $ 3,000,000. The taxpayer receives a recycling equipment tax credit of $ 10,000 and its corporate tax liability is $ 400,000. The manufacturing equipment portion of the credit is $ 60,000 ($ 3,000,000 cost x two percent, not to exceed $ 1,000,000), and the employment investment portion is unavailable until the two years following placement of equipment in service. Therefore, the credit is the lesser of $ 60,000 or $ 190,000 (50 percent of the tax liability less the recycling equipment credit). In this case the allowable credit for XYZ Corporation is $ 60,000, the lesser of the two amounts.

Year 3: XYZ Corporation places additional qualified equipment in service during 1995, which was acquired through a lease agreement. The lease agreement required $ 5,000,000 to be paid over the term of the lease. The taxpayer is not eligible for any other tax credits, and its corporation business tax liability is $ 220,000. The manufacturing equipment portion of the credit is $ 100,000 ($ 5,000,000 total lease cost x two percent, not to exceed $ 1,000,000). The employment investment portion is $ 25,000 (150 measurement year average - 125 base year average = average increase of 25 x $ 1,000, not to exceed three percent of the cost of qualified equipment placed in service in New Jersey in Year 2). Therefore, the credit is the lesser of $ 125,000 ($ 100,000 + $ 25,000) or $ 110,000 (50 percent of the tax liability). In this case the allowable credit for XYZ Corporation is $ 110,000, the lesser of the two amounts. The difference between the total of the two credit portions ($ 125,000) and the credit allowable ($ 110,000), or $ 15,000 may be carried over for a maximum of seven years.

Year 4: Qualified equipment is placed in service during Year 4 at a cost of $ 1,000,000. The taxpayer is not eligible for any other tax credits, and its corporation business tax liability is $ 350,000. The manufacturing equipment portion of the credit is $ 20,000 ($ 1,000,000 total lease cost x two percent, not to exceed $ 1,000,000). The employment investment portion is $ 45,000, based on calculations for the Year 2 and Year 3 investments (150 measurement year average - 125 base year average = average increase of 25 x $ 1,000 or $ 25,000 for the Year 2 investment AND 160 measurement year average - 140 base year average = average increase of 20 x $ 1,000 or $ 20,000 for the Year 3 investment). Therefore, the credit is the lesser of $ 80,000 ($ 20,000 + $ 45,000 + $ 15,000 carryover from Year 3) or $ 175,000 (50 percent of the tax liability). In this case the allowable credit for XYZ Corporation is $ 80,000, the lesser of the two amounts.

N.J. Admin. Code § 18:7-3.21

Amended by 49 N.J.R. 1694(a), effective 6/19/2017