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Did your client qualify for the Manufacturers' Investment Credit?

A brief history

The Manufacturer's Investment Credit (MIC) became effective on January 1, 1994, and was repealed effective January 1, 2004. Although repealed, Revenue and Taxation Code Section 23649(h) allows the MIC to be carried forward for seven or nine years, for qualifying small businesses. Thus, the MIC can be carried forward through the end of taxable years beginning on or after January 1, 2010, or January 1, 2012. Recent State Board of Equalization (BOE) decisions have clarified qualifying taxpayers' ability to claim the MIC.


Qualified taxpayer

A qualified taxpayer must be engaged in at least one line of business described in Standard Industry Code (SIC) 2000 through 3999, or 7371 through 7373 for taxable years beginning on or after January 1, 1998. The SIC codes are listed in the SIC/NAICS Manual, 1987 edition.

Qualified costs

To qualify for the credit, qualified costs must meet all of the following criteria:

  • The cost was incurred for acquiring, constructing, or reconstructing qualified property. The cost must have been paid or incurred on or after January 1, 1994.
  • The taxpayer paid California sales or use tax on qualified property, either directly or indirectly, except for capitalized labor.
  • Amounts paid or incurred for qualified property must be chargeable to the taxpayer's capital account (usually depreciable), except for certain operating leases.
  • Qualified costs may also include capitalized labor costs that are directly allocable to constructing or modifying qualified property.

Qualified property

Generally, qualified property is tangible personal property as defined in Internal Revenue code Section 1245(a), which is used more than 50 percent of the time in a manufacturing, or other related qualified activity.

Qualified activities include:

  • Manufacturing, processing, refining, fabricating, or recycling.
  • Research and development.
  • Maintaining, repairing, testing, or measuring other qualified property.
  • Pollution control (meeting or exceeding established state or local standards.)

See our brochure (FTB 1113) for answers to frequently asked questions about the MIC.

How does all this affect my clients?

Generally, a qualified taxpayer was allowed a MIC equal to six percent of the qualified costs paid or incurred for California qualified property (see definitions above).

The MIC could be claimed for:

Taxable years
beginning on or after:
Qualified costs incurred: Qualified property
placed in service:
January 1, 1995
January 1,1994
January 1, 2004
January 1,1994
January 1, 2004

In the Appeal of Save Mart Supermarkets & Subsidiary 2002-SBE-002, February 6, 2002, BOE addressed a qualified taxpayer issue. Its decision asserted that the activities of a full-service bakery and meat-processing department operating within a grocery store met the criteria for a qualified taxpayer. BOE determined the taxpayer engaged in activities described in Division D of the SIC/NAICS Manual. In addition, BOE found that the bakery and meat operations were more than a "trifling or irrelevant" segment of its overall operations.

BOE again addressed the status of qualified taxpayer in an unpublished 2005 decision, stating that the taxpayer was a qualified taxpayer, and observing that:

. although our Save Mart opinion serves as a precedent in other matters involving the same facts; i.e., other grocery stores with meat and bakery departments, its application under other facts; i.e., with respect to delicatessens and restaurants, among other things, has not been decided by this Board. As a result, if the qualified taxpayer issue is raised in other factual contexts, our analysis in Save Mart will certainly serve to guide us, but will not necessarily require a specific outcome, as we will need to examine the activities as alleged in light of the R&TC Section 23649 and Save Mart.

Your client may have qualified for the MIC if:

  • Based on the language of these BOE decisions, your client had activities described in Division D of the SIC/NAICS Manual.
  • The activity was a significant part of your client's overall operations.
  • Your client paid or incurred qualified costs during the period that the MIC statute was in effect, for California qualified property placed into service after January 1, 1994, and before January 1, 2004.

FTB will give full weight and consideration to these BOE decisions. If you have clients who claimed the MIC on their original return,

  • Or on an amended return.
  • Or who wish to claim the MIC by filing a claim for refund (assuming the statute of limitations has not expired).

They must show they were qualified taxpayers, and that they paid, or incurred qualified costs for qualified property placed into service in California before January 1, 2004.

If your client is under examination, FTB will consider using sampling techniques, or other methods to examine the MIC assets. This will allow us to obtain the information we need to support the qualified costs and qualified property claimed by your client, while minimizing intrusiveness on your client.