Qualified Taxpayer

See R&TC §§17053.49(c) or 23649(c), and CCR, tit. 18, §§17053.49-3 or 23649-3.

• Which SIC code(s) on the form FTB 3535 is reported for the taxpayer's business activity? 
• Which SIC code(s) has the taxpayer used in the past? 
• Are they the same? 

Note: In many cases, the Principal Business Activity (PBA) Code reported on the front of the return will be the same as the SIC Code reported on the form FTB 3535. However, beginning 1/1/98, taxpayers are required to report their PBA code using the four to six digit North American Industry Classification System (NAICS) code. Nevertheless, for purposes of the MIC, taxpayers must continue to use the 1987 edition of the SIC Manual to determine their four digit SIC Code.

Does the taxpayer have at least one operating establishment described under Division D, manufacturing, of the SIC Manual? Division D includes SIC codes 2011-3999, inclusive.

Note: Taxpayers assign their SIC code using the classification of business activity rules contained in the introductory section and appendices in the SIC Manual. The taxpayer's SIC code assignment for reporting purposes to any other federal or state government (other than the FTB) is not determinative of the SIC code that may be assigned for MIC purposes. (CCR, tit. 18, §§17053.49-3(a) and 23649-3(a).) Likewise, the PBA Code that is used for federal and state income tax return purposes may not necessarily reflect the taxpayer's SIC code assignment for purposes of the MIC.

Is the taxpayer's business activity properly classified within SIC codes 2011-3999?

Is the taxpayer's business activity properly classified within SIC codes 7371-7373? If yes, is the tax year beginning on or after 1/1/98?

Note: For income years beginning on or after 1/1/98, the definition of qualified taxpayer includes SIC codes 7371-7373 (computer programming or computer software design).

Does the taxpayer own more than one operating establishment in California? If yes, is the taxpayer claiming the MIC on property located in more than one of these establishments?

Note: If property is located in more than one establishment, each operating establishment must be classified under Division D, manufacturing, and the property must be used in a qualified activity to qualify for the credit, assuming the other requirements are met.

Does the taxpayer's operations involve manufacturing?

Note: Review the cost of goods sold schedule to compare any capitalized labor costs versus capitalized inventory purchase costs. Is labor a reasonable percentage? Generally, manufacturing taxpayers capitalize (under IRC §263A) labor costs as part of inventory. (Note: If the taxpayer has a third party manufacturing the products it develops and sells, the taxpayer may be a retailer and assigned a SIC code under another division of the SIC Manual.)

If the taxpayer is manufacturing goods, are the labor costs that are capitalized to the cost of producing inventory also claimed in the computation of the MIC?

Note: Capitalized labor costs must be directly allocable to the acquisition, construction, or reconstruction of qualified property. (See FTB Legal Ruling 2000-1, Manufacturers' Investment Credit Capitalized Costs Under Third-Party Contracts.) Inventory costs do not qualify for the MIC.

Is the taxpayer's manufacturing establishment located within an Enterprise Zone (EZ)? If yes, the taxpayer may claim the MIC and the EZ sales or use tax credit (SUTC) or business expense deduction (BED) on the same item of property. However, for purposes of the EZ SUTC and BED, the property must be used exclusively within the zone. (See Other California Tax Credits section below.)

•  Is the taxpayer claiming costs for qualified property used in R&D?
• Does the R&D support the qualified taxpayer's manufacturing process?
• Or, is the taxpayer conducting R&D described under SIC code 8731 or some other SIC code?

Note: R&D property can qualify for the MIC provided the qualified property is used in an R&D activity that supports the manufacturing process. An election must be made by the taxpayer to capitalize R&D costs under IRC §174 for such costs to be qualified costs for the MIC. R&D companies that are not classified under Division D, Manufacturing, SIC codes, are generally not qualified taxpayers for purposes of the MIC.For an R&D establishment to be classified under Division D, it must be classified as an auxiliary establishment. Auxiliary establishments are assigned the same SIC code as the establishment they support. For example, if the R&D activity supports an operating establishment with SIC code 3581, the R&D establishment's SIC code would also be 3581. On the other hand, if the R&D activity is classified as an operating establishment it will be assigned a SIC code based on its principal activity, Research & Development, and will be assigned a SIC code in some other division of the SIC Manual.

Plant Tour:

• Did you conduct a plant tour to determine if the taxpayer's business activity, for which the MIC is being claimed, is properly described under the SIC code reported on the form FTB 3535?
• Did you see the location of the qualified property in the manufacturing process?
• Did you see the beginning and the end of the process?
• Did you seek the taxpayer's approval to take pictures or a video of equipment during the plant tour?

Note: It is very important that you understand the taxpayer's manufacturing process. Therefore, prior to your site tour, request a plant map, a diagram of the manufacturing process and the location of the qualified property in the process. Also, check the Internet for company or industry information. Often a diagram of a company's manufacturing process is available on-line.

No plant tour:

• Did you obtain a description of the taxpayer's business activities in California?
• Did you obtain a detailed description of the taxpayer's manufacturing process or other qualified activity?
• Did you determine the beginning and the end of the process?
• Did you request a plant map, a diagram of the exact location of the qualified property used in the manufacturing process or other qualified activity, pictures or a video of material qualified property, if necessary?

Note: When a plant tour cannot be conducted and you have a material asset(s) being claimed as qualified property, consider requesting the taxpayer take a picture of the asset (or make a short video of the asset) to show where and how it is being used in the manufacturing process or other qualified activity.

REMEMBER: If the taxpayer does not meet the Qualified Taxpayer requirement, it cannot claim the credit. You may not need to determine if the other requirements were met.