Multistate Tax Alert: California A.B. 2389 Modifies the Capital Investment Incentive Program and Adds New Aerospace Tax Credit
California Governor Jerry Brown recently signed into law California Assembly Bill (“AB”) 2389, which temporarily modifies the capital investment incentive program (“CIIP”) and creates the aerospace income tax credit (“ATC”) for wages paid by certain eligible aerospace manufacturers.1 The changes contained in AB 2389 include:
- The temporary increase of the property tax incentive amount available under the CIIP, effective July 10, 2014, through June 30, 2015
- The temporary narrowing of the definition of “qualifying manufacturing facility,” effective July 10, 2014, through June 30, 2015
- The extension of the CIIP sunset date from January 1, 2017, to January 1, 2018
- The creation of the new ATC equal to 17.5% of wages paid to qualified full-time employees for taxable years beginning on or after January 1, 2015, and ending before January 1, 2030
This Tax Alert summarizes these and other related law changes.
Capital investment incentive program
Cal. Gov’t Code § 51298 allows local governments to establish a “capital investment incentive program” to provide a property tax rebate for investment in a “qualified manufacturing facility.” Prior to AB 2389, the law allowed a rebate for property tax paid on the assessed value of a qualifying manufacturing facility in excess of $150 million. AB 2389 temporarily lowers the threshold amount of assessed value from $150 million to $25 million,2 effective July 10, 2014 through June 30, 2015,3 with the threshold amount of assessed value reverting to $150 million on July 1, 2015.4 However, the new law does not amend the requirement that a taxpayer’s initial investment in real and personal property, necessary for the full and normal operations of a “qualified manufacturing facility,” must exceed $150 million.
Prior to the enactment of AB 2389, the CIIP was available to a “qualified manufacturing facility,” described by reference to a broad range of Standard Industrial Classification codes that encompassed a significant portion of manufacturers. Effective July 10, 2014, through June 30, 2015, the new law narrows the definition of a “qualified manufacturing facility” to include only those businesses described in North American Industry Classification System Manual (“NAICS”) code 3364 (Aerospace Product and Parts Manufacturing), in addition to businesses in NAICS code 3359 (Other Electrical Equipment and Component Manufacturing).5 On July 1, 2015, the NAICS codes qualifying for the CIIP will expand to NAICS codes 3321 to 3399, inclusive, and NAICS codes 541711 or 541712.6
AB 2389 also requires the recipient of a CIIP incentive to enter into a “community services agreement” with the applicable local municipality. The agreement must specify the recipient’s required payment of a “community service fee” to the local municipality during each fiscal year covered by the agreement.7 The amount of the fee will equal 25% of the CIIP incentive amount calculated for the fiscal year, up to a maximum fee amount of $2 million.8 The agreement must also provide the fee payment dates, the procedure for handling delinquent payments, and a job creation plan.9
The new law also extends the sunset date of the CIIP from January 1, 2017, to January 1, 2018,10 and permanently transfers oversight duties of the CIIP from the Business, Transportation and Housing Agency to the Governor’s Office of Business and Economic Development.11
Aerospace tax credit
AB 2389 creates the ATC, described in the new statute as a wage-based tax credit for manufacturers of “new advanced strategic aircraft for the United States Air Force” for taxable years beginning on or after January 1, 2015, and before January 1, 2030. This income tax credit is equal to 17.5% of qualified wages paid to qualified full-time employees during the taxable year.12
The phrase “new advanced strategic aircraft for the United States Air Force” refers to aircraft developed and produced for the United States Air Force under the “New Advanced Strategic Aircraft Program,” which includes projects to design, test, manufacture, or otherwise support production of a new advanced strategic aircraft for the U.S. Air Force under a contract that is expected to be awarded in the first or second calendar quarter of 2015.13
To qualify for the credit, a taxpayer must fall under the definition of a “major first-tier subcontractor” that is awarded a subcontract to manufacture property or components to use in a new advanced strategic aircraft for the U.S. Air Force.14 A major first-tier subcontractor is defined as a subcontractor that was awarded a subcontract in an amount of at least 35% of the amount of the initial prime contract awarded for the manufacturing of a new advanced strategic aircraft for the U.S. Air Force.15
For wages to qualify, they must be paid to an employee whose services for the qualified taxpayer are at least 80% directly related to the taxpayer’s qualifying subcontract and who is either paid qualified wages for services not less than an average of 35 hours per week or is a salaried full-time employee.16
The aggregate amount of credits to be awarded to all qualified taxpayers is capped at $25 million for each of the first five years of the credit, $28 million for each of the next five years, then $31 million for each of the final five years, for a total of $420 million over 15 years.17 The Franchise Tax Board will allocate credits on a first-come, first-served basis. The $420 million allocated to the Aerospace Tax Credit is drawn from the California Competes Tax Credit (“CCTC”) fund, which provides income tax credits for businesses that establish facilities in California or expand existing operations in California, thereby lowering the amount of funding available to businesses qualifying for the CCTC fund by the aggregate amount of the new ATC claimed by taxpayers.18
If the ATC exceeds the taxpayer’s tax liability for the tax year, the excess may be carried over to the following year and to the seven succeeding years until the credit is exhausted.19
Businesses that potentially qualify for the CIIP property tax rebate or the ATC should carefully review the changes contained in AB 2389. Both the CIIP and the ATC include specific qualification requirements that must be examined in order to determine eligibility. While AB 2389 does not appear to have broad application to taxpayers throughout California, perhaps the most significant aspect to the enactment of the new law is the state’s apparent willingness to create new and enhanced incentives directed at promoting significant investment and job growth in the state.
If you have questions regarding AB 2389 or other California tax credits and incentives, please contact any of the following Deloitte Tax professionals.
Deloitte Tax LLP, San Francisco
+1 415 783 6041
Deloitte Tax LLP, San Francisco
+1 415 783 6368
Deloitte Tax LLP, San Francisco
+1 415 783 6216
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1 AB 2389 (enrolled July 10, 2014) 2014-15 Leg., (Cal. 2014), signed by Governor Jerry Brown on July 10, 2014.
2 AB 2389, Section 1, amending Cal. Gov’t Code §51298(b)(3),
3 AB 2389, Section 7; AB 2389, Section 1, amending Cal. Gov’t Code §51298(f).
4 AB 2389, Section 2, amending Cal. Gov’t Code §51298(b)(3).
5 AB 2389, Section 1, amending Cal. Gov’t Code §51298(b)(1)(C)(i).
6 AB 2389, Section 2, amending Cal. Gov’t Code §51298(b)(1)(C)(i).
7 AB 2389, Section 1, amending Cal. Gov’t Code §51298(d)(1).
9 AB 2389, Section 1, amending Cal. Gov’t Code §51298(d)(2), (5).
10 AB 2389, Section 3, amending Cal. Gov’t Code § 51298.5(a).
11 AB 2389, Section 1, amending Cal. Gov’t Code §51298(b)(1)(A).
12 AB 2389, Section 5, adding Cal. Rev. & Tax. Code § 23636(a).
13 AB 2389, Section 5, adding Cal. Rev. & Tax. Code § 23636(b)(6) and (7).
14 AB 2389, Section 5, adding Cal. Rev. & Tax. Code § 23636(b)(4).
16 AB 2389, Section 5, adding Cal. Rev. & Tax. Code § 23636(b)(3).
17 AB 2389, Section 5, adding Cal. Rev. & Tax. Code § 23636(c)(1).
18 AB 2389, Section 6, amending Cal. Rev. & Tax. Code § 23689(g)(1)(E)(i).
19 AB 2389, Section 5, adding Cal. Rev. & Tax. Code § 23636(d).