Questions and Answers

Identifying Information:Business and Job Development Credit Questions and Answers
Tax Type:Corporate Income Tax; Individual Income Tax; Privilege
Brief Description:General queestions and answers concerning Business and Job Development Credits.
Keywords:
Approval Date:01/24/2006



Body:
Office of Policy & Research


GENERAL QUESTIONS AND ANSWERS
BUSINESS AND JOB DEVELOPMENT CREDIT

Base-When to Use a Base
Question
1. When must I use a base of employees and investment?

Answer
The most common times a base would be used are as follows:
When you are adding onto an existing facility;
When you are adding qualified investment at an existing facility;
When you move a facility from one location in Kansas to another location in Kansas; and
When you transfer employees and/or investment from one location in Kansas to a new location in Kansas.

Question
2. A taxpayer has a facility in Goodland and opens a new qualified business facility in Wichita. Does the qualified investment in Wichita need to use a base?

Answer
No. The investment in Wichita is considered as a new business facility in Wichita. If however, employees and investment are moved from the Goodland facility to the Wichita facility, then the Wichita facility would need to use a base.

Question
3. A taxpayer has a facility in Wichita and decides to move this business entirely to another area within Wichita. Does the qualified investment in this new facility need to use a base?

Answer
Yes. Because the entire operations are moving from one location in Kansas to another location in Kansas, a base of qualified business facility investment and qualified business facility employees must be used. In other words, this taxpayer will not receive a credit for qualified business facility investment or qualified business facility employees that were moved. The base will be the previous location’s average qualified business facility employees and investment for the preceding tax year.

Question
4. A taxpayer has a facility in Wichita and decides to construct a new structure to run concurrently with the existing facility at the same location. Does this new structure and the existing structure constitute a complex of buildings?

Answer
Yes. Because the taxpayer is constructing a new structure at the same location that the original facility is located and because the original facility will also be in operation, the new structure and the original facility will be considered as a complex of buildings.

Beginning Operations in the Middle of the Tax Year
Question
5. I am a calendar year taxpayer and I began operations at my qualified business facility on August 18. How should I complete Parts C and D of Schedule K-34 for the current number of employees and current amount of investment at the end of each month?

Answer
K.S.A. 79-32,154(d) and (e) provide that if the qualified business facility is in operation for less than the entire tax year, the number of qualified business facility employees and the qualified business facility investment shall be determined by dividing the sum of the total employees and value of investment by the number of full calendar months which the qualified business facility was in operation. In this instance, the taxpayer would enter and add the full months of September through December for the number of employees and amount of investment and divide by 4.

Beginning Operations at the End of the Tax Year
Question
6. I am a calendar year taxpayer and I began operations at my qualified business facility on December 18. Can I claim a tax credit for this tax year that I began operations?

Answer
No. K.S.A. 79-32,154(d) and (e) provide that if the qualified business facility is in operation for less than the entire tax year, the number of qualified business facility employees and the qualified business facility investment shall be determined by dividing the sum of the total employees and value of investment by the number of full calendar months which the qualified business facility was in operation. Since the qualified business facility was not in operation for a full month, the taxpayer cannot claim a credit for this tax year. The taxpayer will be eligible to claim the credit for the next tax year beginning in January for the qualified business facility which began operations December 18th of the preceding tax year.

Business Activity “Manufacturer or Nonmanufacturer” Claiming the Credit Under the Ten Year Recomputation
Question
7. Can a manufacturer or a nonmanufacturer that meets the definition of “business” claim the credit under K.S.A. 79-32,153, instead of K.S.A. 79-32,160a?

Answer
Yes. A manufacturer or nonmanufacturer may claim the credit as allowed under K.S.A. 79-32,153. The taxpayer will be allowed $100 for each qualified employee and for each investment credit factor and must recompute the credit for each of the nine succeeding taxable years. The taxpayer must also follow any other limitations under that law.

Business Activity “Nonmanufacturer” and Not Enough Employees
Question
8. If a taxpayer meets the definition of “nonmanufacturer” and hires 4 qualified business facility employees as a direct result of the investment made at the qualified business facility, can the taxpayer still receive a tax credit under K.S.A. 79-32,160a?

Answer
No. The taxpayer may not receive a credit under K.S.A. 79-32,160a, as a nonmanufacturing business must have an increase of at least 5 qualified business facility employees. However, the taxpayer may claim the credit as allowed under K.S.A. 79-32,153 if they have at least two qualified business facility employees. The taxpayer will be allowed $100 for each qualified employee and for each investment credit factor. The credit will be recomputed for each of the nine succeeding taxable years.

Business Activity “Retail” Service Providers
Question
9. What are the service providers as set forth in K.S.A. 17-2707?

Answer
K.S.A. 17-2707(b) provides,
“Professional service means the type of personal service rendered by a person duly licensed,
registered or certified by this state as a member of any of the following professions, each paragraph
constituting one type:
(1) A certified public accountant;
(2) an architect;
(3) an attorney-at-law;
(4) a chiropractor;
(5) a dentist;
(6) an engineer;
(7) an optometrist;
(8) an osteopathic physician or surgeon;
(9) a physician, surgeon or doctor of medicine;
(10) a veterinarian;
(11) a podiatrist;
(12) a pharmacist;
(13) a land surveyor;
(14) a licensed psychologist;
(15) a specialist in clinical social work;
(16) a licensed physical therapist;
(17) a landscape architect;
(18) a registered professional nurse;
(19) a real estate broker or salesperson;
(20) a clinical professional counselor;
(21) a geologist;
(22) a clinical psychotherapist;
(23) a clinical marriage and family therapist;
(24) a licensed physician assistant; and
(25) a licensed occupational therapist.”

Combined Return Filed
Question
10. A taxpayer group includes several entities. A combined return is filed in Kansas. One of these entities within the group has earned a business and job development credit. May the group spread this tax credit against the entire combined return’s liability?

Answer
No. The credit must be applied against the entity’s liability that earned it. The credit may not be applied against the entire combined group’s liability. As with any credit, that credit belongs to the taxpayer that earned it.

Election to Defer
Question
11. May I defer the taking of my credit?

Answer
Yes, you may elect to defer the credit under K.S.A. 79-32,153. To perfect the election, the taxpayer must notify the department, by submitting the Schedule K-34 for the taxable year in which the commencement of commercial operations at the qualified business facility occurs. The taxpayer must indicate that they are deferring the credit by checking the box on page 1 of Schedule K-34 and entering the tax year they wish to defer to.

Question
12. I bought some machinery in 2000 and hired 4 employees as a direct result and did not file Schedule K-34 to claim the credit. May I do so at this time? Can I elect to defer the credit at this time also? The credit is being claimed under K.S.A. 79-32,153.

Answer
In order to claim the credit you will need to complete Schedule K-34 for the 2000 tax year (the year QBFI became operational) to show that you initially qualified. A Schedule K-34 for the initial year should be enclosed with an amended return and submitted to the Department. You may claim the credit in any prior tax years; however the nine years of recomputation begin following that initial year, or the year 2001 in this example. While amended returns may be filed for tax years closed by statute, refunds will not be made for these years.

In order to make an election to defer the credit, the year the taxpayer began operations at the qualified investment must not be closed by statute.

More than One Investment – Same Location – “Retailers” and Other Taxpayers Computing the $100 Credit
Question
13. The taxpayer has operated a business in the same location since the 1950’s. In 2002, investment was made that resulted in the hiring of additional employees so credit 1 was started. In 2003, credit 2 was started because a new investment resulted in two or more employees. In 2004, again a qualified investment directly resulted in the hiring of more than two employees. How is the credit computed for each year? The credit is claimed under K.S.A. 79-32,153.

Answer
The method below is to be used to compute qualified business facility employees for a business and job development credit when a business has more than one credit. Once qualified investment is created, the number of qualified employees and the amount of qualified investment for the prior year remains the same for the remainder of the credit unless there is a decrease in employment or investment. Where there is a decrease, the prior year or years employee or investment increase is reduced. Should the decrease reduce the level of employees to less than the minimum increase of two or the investment is reduced to the base amount or lower, then any remaining years of the credit computation are forever lost.

In this illustration, in tax year 2002 there would be 5 employees for credit 1. In tax year 2003, there are two credits to compute, the 5 employees from credit 1 and the 8 employees from credit 2. In tax year 2004, there are three credits to compute, the 5 employees from credit 1, the 8 employees from credit 2 and the 4 employees from credit 3. The investment portion of the business and job development credit would be computed in a similar manner to the employee portion of the credit.


TY 2002TY 2003TY 2004
Average employees for the year202832
Base average employees for prior year152028
Qualified employees for each qualified investment5*8*4*
*This number will remain constant through the ten year period, unless there is a decrease in employment.

Moving the Qualified Business Facility Investment-All of the Old Investment was Sold-“Retailers” and Other Taxpayers Computing the $100 Credit
Question
14. A taxpayer that previously qualified for the credit and still has 5 years remaining to recompute the credit moves their business operations from the original qualified business facility in Kansas to another qualified business facility within Kansas. The old building was sold and the taxpayer purchased a new building and new equipment. They still have the same number of employees. How is their credit computed? The credit is being claimed under K.S.A. 79-32,153.

Answer
The credit for which the taxpayer previously qualified would be continued for the remainder of the 10 year period.

Moving the Qualified Business Facility Investment-New Employees and Investment-“Retailers” and Other Taxpayers Computing the $100 Credit
Question
15. A business that previously qualified for the credit and still has 5 years remaining to recompute the credit moves their business operations from the original qualified business facility in Kansas to another qualified business facility in Kansas and also makes additional investment and hires additional employees at their new location. Is the taxpayer entitled to the remainder of their original credit and how is it computed and is the taxpayer entitled to a new credit on the new qualified investment? The credit is being claimed under K.S.A. 79-32,153.

Answer
The taxpayer is entitled to the remainder of the credit on their original qualified investment and employees. The qualified employees and investment would remain constant through the remaining five years, unless there is a decrease in employment.

The taxpayer would also qualify for a second credit if they had investment over and above the prior year’s base and hired the necessary number of qualified employees as a direct result of that investment.

Moving the Qualified Business Facility Investment-Some of the Qualified Investment Retained-“Retailers” and Other Taxpayers Computing the $100 Credit
Question
16. A taxpayer that previously qualified for the credit and still has 5 years remaining to recompute the credit moves their business operations from the original qualified business facility to another qualified business facility within Kansas. Can the taxpayer still claim the credit? Does the credit start over? The taxpayer kept some of the old qualified investment and made additional investment over and above the dollar value at the old facility at the new location, does the taxpayer get a credit for that additional investment? The credit is being claimed under K.S.A. 79-32,153.

Answer
The credit for which the taxpayer previously qualified would be continued for the remainder of the 10 year period.

The taxpayer may qualify for a credit at the new location if the taxpayer has investment over and above the prior year’s base and hired the necessary number of qualified employees as a direct result of that investment.

Pass Through Entities
Question
17. The legal entity is a subchapter S corporation and qualifies for the credit as a “manufacturer”. The business had a loss. Are the shareholders entitled to claim a credit on their individual tax returns for that period?

Answer
If the subchapter S corporation qualified and is defined as a “manufacturer” in the business and job development credit law, the shareholders may claim the credit at the individual level if they had a tax due on their individual tax return. For manufacturers’ and nonmanufacturers’ qualified investments which began operations in tax years commencing on or after January 1, 1996, the limitation is set at 100% of Kansas income tax.

For qualified investments which commenced on or after December 31, 1992, the statute sets a limitation of the amount of credit a taxpayer may claim in any one year in the case of a “retail business” at 50% of the tax on qualified business facility income. If the credit is computed under K.S.A. 79-32,153, a taxpayer would not be entitled to a credit if the business had a loss for that year.

Question
18. An S corporation meets the definition of “manufacturer” in a tax year. How is the credit computed for each shareholder?

Answer
The S corporation will complete Schedule K-34, Part A, Part B, lines 8 through 19, Part C, and Part D. This information will then be passed to each shareholder. Each shareholder must complete the remaining portion (Part B, lines 20 through 24) of the Schedule K-34, entering their ownership percentage and computing the credit based upon this ownership percentage in the S corporation. The completed Schedule K-34 will then be filed by the shareholder with their income tax return. The S corporation must also file a copy of their completed Schedule K-34 with their S corporation return.

Previously Failed to Claim the Credit. Is it too Late?-Manufacturers and Nonmanufacturers and Others Computing the Credit Allowed under K.S.A. 79-32,160a
Question
19. A taxpayer bought some machinery in 2000 and hired the required number of employees for a manufacturing business or nonmanufacturing business as a direct result but has not filed a K-34 and claimed the credit. May the taxpayer file a K-34 at this time? The credit is being claimed under K.S.A. 79-32,160a.

Answer
A taxpayer may complete an amended return for 2000 in order to establish the credit under K.S.A. 79-32,160a, that may be carried forward for use in an open year. To establish the credit for the closed year, the taxpayer must show that an investment was made and that the appropriate number of qualified business facility employees were hired as a direct result of the investment. Once a credit is established for the closed year and that credit is applied against that closed year’s tax liability, any credit remaining from that closed year may be carried forward to each succeeding year as long as the taxpayer has maintained the required minimum number of qualified business facility employees. Any carryover shall be applied against each closed year’s tax liability through the filing of amended returns until the oldest year that is open for purposes of the statute of limitations is reached. For that year, the Department will issue a refund or credit based on the amended return being filed, provided that a credit remains after having applied the carry forward to each preceding closed year’s tax liability. The Department will not issue a refund for any years that are closed by the statute of limitations. If at any time during the carry forward period the minimum number of qualified business facility employees are not maintained, the credit ends.

Qualified Business Facility
Question
20. What is a qualified business facility?

Answer
K.S.A. 79-32,154(b) defines qualified business facility as, “a facility which satisfies the requirements of paragraphs (1) and (2) of this subsection.
(1) Such facility is employed by the taxpayer in the operation of a revenue producing enterprise, as defined in subsection (c). Such facility shall not be considered a qualified business facility in the hands of the taxpayer if the taxpayer's only activity with respect to such facility is to lease it to another person or persons. If the taxpayer employs only a portion of such facility in the operation of a revenue producing enterprise, and leases another portion of such facility to another person or persons or does not otherwise use such other portions in the operation of a revenue producing enterprise, the portion employed by the taxpayer in the operation of a revenue producing enterprise shall be considered a qualified business facility, if the requirements of paragraph (2) of this subsection are satisfied.
(2) If such facility was acquired by the taxpayer from another person or persons, such facility was not employed, immediately prior to the transfer of title to such facility to the taxpayer, or to the commencement of the term of the lease of such facility to the taxpayer, by any other person or persons in the operation of a revenue producing enterprise and the taxpayer continues the operation of the same or substantially identical revenue producing enterprise, as defined in subsection (i), at such facility.”

K.S.A. 79-32,154(a) defines facility as, “any factory, mill, plant, refinery, warehouse, feedlot, building or complex of buildings located within the state, including the land on which such facility is located and all machinery, equipment and other real and tangible personal property located at or within such facility used in connection with the operation of such facility. The word "building" shall include only structures within which individuals are customarily employed or which are customarily used to house machinery, equipment or other property.”

A facility shall be considered as a permanent building or structure. A temporary mobile work site or job site does not constitute a facility.

Machinery and equipment that is moved from place to place in the process of performing various projects does not constitute a facility and the fact that such machinery and equipment may remain in one location while being used on a long-term project does not cause it to become a facility.

Qualified Business Facility Employees
Question
21. How are the number of qualified business facility employees determined?

Answer
K.S.A. 79-32,154(d) provides, “The number of qualified business facility employees during any taxable year shall be determined by dividing by 12 the sum of the number of qualified business facility employees on the last business day of each month of such taxable year. If the qualified business facility is in operation for less than the entire taxable year, the number of qualified business facility employees shall be determined by dividing the sum of the number of qualified business facility employees on the last business day of each full calendar month during the portion of such taxable year during which the qualified business facility was in operation by the number of full calendar months during such period. Notwithstanding the provisions of this subsection, for the purpose of computing the credit allowed by K.S.A. 79-32,153, and amendments thereto, in the case of an investment in a qualified business facility, which facility existed and was operated by the taxpayer or related taxpayer prior to such investment, the number of qualified business facility employees employed in the operation of such facility shall be reduced by the average number, computed as provided in this subsection, of individuals employed in the operation of the facility during the taxable year preceding the taxable year in which the qualified business facility investment was made at the facility.
(2) For taxable years commencing after December 31, 1997, in the case of a taxpayer claiming a credit against the premium tax and privilege fees imposed pursuant to K.S.A. 40-252, and amendments thereto or the privilege tax as measured by net income of financial institutions imposed pursuant to chapter 79 article 11 of the Kansas Statutes Annotated, “qualified business employee” shall not mean any person who is employed in the operation of a qualified business facility in the state due to the merger, acquisition or other reconfiguration of the taxpayer unless such employee’s position represents a net gain of total positions created by the taxpayer and the employee’s position was not in existence at the time of the merger acquisition or other reconfiguration of the taxpayer.”

Qualified business facility employees shall be computed based on a facility location. If a taxpayer has several facilities located throughout the state, each facility or complex of buildings shall stand on its own when computing qualified business facility employees and qualified business facility investment.

It is important to remember that when computing the average number of qualified business facility employees, you must round down.

Question
22. Can part-time employees and seasonal employees be considered as qualified business facility employees?

Answer
Yes. A person shall be considered as a qualified business facility employee if the person performs duties in connection with the operation of the qualified business facility on: (A) a regular, full-time basis; (B) a part-time basis, provided the person is customarily performing such duties at least 20 hours per week throughout the taxable year; or (C) a seasonal basis, provided the person performs duties for substantially all of the season customary for the position in which the person is employed.

Question
23. Are leased employees whose services are provided to a taxpayer by a professional employment organization considered to be qualified business facility employees?

Answer
As of January 1, 2000, assigned workers who perform services for a taxpayer pursuant to the terms of a professional employer arrangement with a professional employment organization are considered to be employees of the taxpayer. If the taxpayer is otherwise eligible to claim a credit and the workers perform duties in connection with the operation of the qualified business facility they shall be considered qualified business facility employees.

K.S.A. 79-3269(a)(5) defines a professional employer arrangement as “an arrangement, under contract or whereby:
(A) A professional employer organization agrees to employ all or a majority of a client’s workforce;
(B) the arrangement is intended to be, or is, ongoing rather than temporary in nature;
(C) employer responsibilities for workers under the arrangement are in fact shared by the professional employer organization and the client; and
(D) for the purposes of this act, a professional employer arrangement shall not include:
(i) Arrangements wherein a person, whose principal business activity is not entering into professional employer arrangements, shares employees with a commonly owned company within the meaning of section 414(b) and (c) of the federal internal revenue code of 1986, as amended, and which does not hold itself out as a professional employer organization. Question
24. Are shared employees whose services are provided to a taxpayer by a commonly owned company considered to be qualified business facility employees?

Answer
No. Workers whose services are shared or provided by an entity whose principal business activity is not entering into a professional employer arrangement shall not be considered qualified business facility employees for purposes of the business and job development credit.

Question
25. Are shared employees whose services are provided to a taxpayer by a commonly owned company that is also a professional employer organization considered to be qualified business facility employees?

Answer
No. K.S.A. 79-3269 provides that a professional employer arrangement shall not include arrangements wherein a person whose principal business activity is not entering into professional employer arrangements, shares employees with a commonly owned company and which does not hold itself out as a professional employer organization. Because these employees are shared with a commonly owned company, the employees cannot be considered as qualified business facility employees.

Question
26. My employees do not actually work at my qualified business facility, rather they go out and perform services for clients that have contracted with me. Can I consider these employees as qualified business facility employees for purposes of the business and job development credit?

Answer
If your employee performs services for you outside the qualified business facility, the employee shall be considered engaged or maintained in employment at the qualified business facility if (1) the employee’s services performed outside the qualified business facility is incidental to the employee’s service inside the qualified business facility, or (2) the base of operations or, the place from which the services is directed or controlled, is at the qualified business facility.

Question
27. I have hired new employees but have not made any investment. Do I qualify for the business and job development credit?

Answer
No. In order to qualify for the business and job development credit, you must hire a minimum number of employees as a direct result of investment made at a qualified business facility.

Question
28. In order to claim any remaining credit carry forward, must I maintain the required number of employees over the base period?

Answer
Yes. A business which invests in a qualified business facility and hires a required number of employees over and above the base period, for work at such facility as a direct result of its investments in such qualified business facility is entitled to claim the credit in the year in which the investment is made. In order to claim any remaining credit carry forward, the business must continually maintain the minimum required number of employees over the base period. If at any time this number is not maintained, the credit stops, and any carry forward credit remaining, is lost.

Qualified Business Facility Income
Question
29. When must the two-factor formula of property and payroll be used to compute the qualified business facility income?

Answer
Whenever new investment and employees qualify for the job expansion and investment credit under K.S.A. 79-32,153, the credit shall be a portion of the tax, not to exceed 50% of the tax liability, imposed on the taxpayer’s qualified business facility income. When the taxpayer has income derived from the operation of a qualified business facility as well as from other activities conducted within the state, the two-factor formula of property and payroll must be used to determine the portion of the taxpayer’s Kansas taxable income attributable to the qualified business facility. The property factor is computed using as the numerator the qualifying investment at the qualified business facility and the denominator is represented by all Kansas property of the taxpayer, as defined in K.S.A. 79-3281 and 79-3282. The payroll factor is computed using as the numerator the payroll of the qualifying employees at the qualified business facility and the denominator is represented by all Kansas payroll of the taxpayer, as defined in K.S.A. 79-3283. These two factors are divided by two and the resulting average is multiplied by the Kansas taxable income of the taxpayer.

The credit under K.S.A. 79-32,153 provides for the credit to be claimed in the initial year qualified and for each of the succeeding nine tax years (if minimum requirements are maintained). The credit limitation will be recomputed each year using the current tax year’s applicable information for computing the two-factor formula and Kansas taxable income.

For assistance in determining your property factor, payroll factor and tax on qualified business facility income, please refer to the sample on the back of Schedule K-34.

Qualified Business Facility Investment
Question
30. How is qualified business facility investment computed?

Answer
K.S.A. 79-32,154 provides, “The qualified business facility investment shall be determined by dividing by 12 the sum of the total value of such property on the last business day of each calendar month of the taxable year. If the qualified business facility is in operation for less than an entire taxable year, the qualified business facility investment shall be determined by dividing the sum of the total value of such property on the last business day of each full calendar month during the portion of such taxable year during which the qualified business facility was in operation by the number of full calendar months during such period. Notwithstanding the provision of this subsection, for the purpose of computing the credit allowed by K.S.A. 79-32,153, and amendments thereto, in the case of an investment in a qualified business facility, which facility existed and was operated by the taxpayer or related taxpayer prior to such investment the amount of the taxpayer’s qualified business facility in such facility shall be reduced by the average amount, computed as provided in this subsection, of the investment of the taxpayer or a related taxpayer in the facility for the taxable year preceding the taxable year in which the qualified business facility investment was made at the facility.”

Qualified business facility investment shall be computed based on a qualified business facility location. If a taxpayer has several qualified business facilities throughout the state, each facility or complex of buildings shall stand on its own when computing qualified business facility employees and qualified business facility investment.

When computing qualified business facility investment, if the average qualified business facility investment is $51,000 or more, you may round to the next higher number. One credit factor is allowed for amounts of $51,000 to $150,999.

If an investment is made, but the credit factor is zero (because the average qualified business facility investment is between $1 and $50,999), the qualified business facility investment credit is zero; however the taxpayer may still be eligible for the credit associated with the qualified business facility employees.

Question
31. Does investment that leaves the qualified business facility qualify as qualified business facility investment?

Answer
No. Investment that leaves the facility, such as automobiles, trucks, construction equipment, or other mobile property shall not be considered as qualified business facility investment.

Question
32. I have made new investment but have not hired any new employees. Do I qualify for the business and job development credit?

Answer
No. In order to qualify for the business and job development credit, you must hire a minimum number of employees as a direct result of investment made at a qualified business facility.

Question
33. I made additional investment this year and hired the required number of qualified business facility employees as a direct result of the investment made. I also disposed of some equipment during this tax year. After I subtract out my base year average investment, I have a negative qualified business facility investment of -$50,000. Can I still qualify for the credit?

Answer
No. K.S.A. 79-32,154(e) provides that when a qualified business facility is operated by the taxpayer or related taxpayer in the preceding tax year, a “base” is subtracted from the current tax year’s qualified business facility investment. A “base” is the qualified business facility investment at the qualified business facility in the preceding tax year. When the current tax year’s qualified business facility investment is less than the base, no credit will be allowed because the calculation did not show that the qualified business investment increased.

Question
34. Is software considered as qualified business facility investment?

Answer
Software shall be considered as qualified business facility investment if the software is considered as tangible personal property and is included in the property factor for apportionment purposes.

Question
35. How is rented property valued?

Answer
K.A.R. 92-12-89 provides,
“Property rented by the taxpayer is valued at eight (8) times its net annual rental rate. The net annual rental rate for any item of rented property is the annual rental rate paid by the taxpayer for such property, less the aggregate annual subrental rates paid by subtenants of the taxpayer.

Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business of the taxpayer when it is producing such income. Accordingly there is no reduction in its value.

“Annual rental rate” means the amount paid as rental for property for a 12-month period (i.e., the amount of the annual rent). Where property is rented for less than a 12-month period, the rent paid for the actual period of rental shall constitute the “annual rental rate” for the tax period. However, where a taxpayer has rented property for a term of twelve (12) or more months and the current tax period covers a period of less than twelve (12) months, the rent paid for the short tax period shall be annualized. If the rental term is for less than twelve (12) months, the rent shall not be annualized beyond its term. Rent shall not be annualized because of the uncertain duration when the rental term is on a month to month basis.

“Annual rent” means the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property and includes: (a) Any amount payable for the use of real or tangible personal property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise.

(b) Any amount payable as additional rental or in lieu of rents, such as interest, taxes, insurance, repairs or any other items which are required to be paid by the terms of the lease or other arrangement, not including amounts paid as service charges, such as utilities, janitor services, etc. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and the other items.

“Annual rent” does not include incidental day-to-day expenses such as hotel or motel accommodations, daily rental of automobiles, etc.

Leasehold improvements shall, for the purposes of the property factor, be treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor.”

Recertifying to Claim the Credit
Question
36. A nonmanufacturing taxpayer claims the business and job development credit for tax year 2004 and has remaining carry forward available after applying the credit against it’s 2004 Kansas tax liability. Does the taxpayer need to maintain the same number of employees they originally qualified for in the original tax year to claim the remaining carry forward in succeeding tax years?

Answer
No. The nonmanufacturing taxpayer must demonstrate that they have maintained five qualified business facility employees above the base. The taxpayer must complete Schedule K-34 indicating that the minimum number of five employees has been maintained.

Reduction of Qualified Employees and Investment “Retailers” and Other Taxpayers Computing the $100 Credit
Question
37. A taxpayer had the following activity at his qualified business facility. Prior to tax year 2001 the average employee level had been steady at 5 employees and average investment of $200,000 for the last several years. In tax year 2001, the taxpayer made investment at the QBF and hired additional employees as a direct result. The average employees for tax year 2001 was 9 and average investment was $258,000. In tax year 2002 more employees were hired as a direct result of investment. The average employees at the QBF were 15 and average investment was $286,000. During tax year 2003, 8 employees were laid off and $25,000 of investment was sold. In 2004, 2 new pieces of equipment were purchased for $75,000 and employees were increased by 2 as a direct result. During 2005, the average employment was reduced to 8, but total average investment increased to $375,000. How should the credits be computed when completing the tax returns for tax years 2003, 2004, and 2005? (The credits are being claimed under K.S.A. 79-32,153.)

Answer
The facts are as follows:
Tax Year 2001
Tax Year 2002
Tax Year 2003
Tax Year 2004
Tax Year 2005
Average Employees at QBF
9
15
7
9
8
Base (Prior year’s average)
(5)
(9)
(15)
(7)
(9)
Increase (QBF employees)
4
6
(8)
2
(1)
Employees available for credit:
Credit originated in tax year 2001
4
4
2
2
2
Credit originated in tax tear 2002
6
Credit disallowed
Credit originated in tax year 2004
2
Credit disallowed
Average Investment at QBF
258,000
286,000
261,000
336,000
375,000
Base (Prior year’s average)
(200,000)
(258,000)
(286,000)
(261,000)
(336,000)
Increase (QBF investment)
58,000
28,000
(25,000)
75,000
39,000
Investment available for credit:
Credit originated in tax year 2001
58,000
58,000
58,000
58,000
58,000
Credit originated in tax tear 2002
28,000
Credit disallowed
Credit originated in tax year 2004
75,000
Credit disallowed


Credit Computations for Tax Year 2003
For tax year 2003, the taxpayer did not make an increase of investment that directly resulted in an increase of at least two employees at the QBF. Actually, the level of employment dropped at the QBF by eight and investment decreased by $25,000. A new credit for tax year 2003 can not be started. Credits originated in prior years need to be reviewed to evaluate if the decrease in either employment or investment affected their credit computations.

The credit that originated in tax year 2002 had a base of 9 employees. In tax year 2003, the overall level of employment was 7. To continue the credit originated in tax year 2002, the minimum level of employment must be at least 11 employees. (11-9 =2) This level was not maintained in tax year 2003, so the credit originated in 2002 is permanently terminated. A similar review is made for investment. The investment base for the credit originated in tax year 2002 was $258,000. In tax year 2003 the level of investment at the QBF was $261,000. Even though overall investment declined from tax year 2002 to 2003, the minimum level of investment ($258,000) for the 2002 credit was maintained. Had it not been for the decrease in employment for this credit, the credit could have continued.
The credit that originated in tax year 2001 had a base of 5 employees. In tax year 2003, the overall level of employment was 7. To continue the 2001 credit, the minimum level of employment must be at least 7. (7- base of 5 = 2) The absolute minimum employee level for the 2001 credit was maintained in tax year 2003. The 2001 credit can continue, but the employee credit will be decreased to 2 employees (7- base of 5 = 2) instead of the original 4 employees. The investment level for the 2001 credit is analyzed. In tax year 2003, the level of investment at the QBF is $261,000. This is greater than the total investment in the 2001 credit's originated year of $258,000. There will be no change to the level of investment for the credit originated in 2001 for tax year 2003.

Credit Computations for Tax Year 2004
For tax year 2004, the taxpayer made additional investment of $75,000 at the QBF which directly resulted in the increase of 2 employees. A new credit originating in this tax year can be started with 2 employees and $75,000 of investment. The credits originated in prior tax years should be reviewed.
The credit originated in tax year 2002 was permanently terminated in tax year 2003, so there is no more analysis of that credit. The credit originated in 2001 is still active in tax year 2004. In tax year 2004, the average level of employment at the QBF is 9. This is greater than revised maximum level of employment available for the 2001 credit which is 7. There is no adjustment to the employees for the 2001 credit in this tax year. The employee level is still 2. (7-base of 5 = 2) The investment level at the QBF in tax year 2004 is $336,000. This is greater than the original qualifying level of investment for the 2001 credit. There is no adjustment to the level of investment for the 2001 credit ($258,000). The increase of investment remains at $58,000 for the 2001 credit.

Credit Computations for Tax Year 2005
For tax year 2005, the average employee count was reduced to 8. Average investment at the QBF was increased by $39,000. Because there was no additional employees added as a direct result of the investment, no credit is allowed for tax year 2005. The credits originated in prior tax years should be reviewed.

The credit originated in tax year 2004 needed to maintain a minimum employee level of 9, to keep the credit active (9-base of 7 = 2). In tax year 2005, the average employee level was decreased to 8, so the credit originated in tax year 2004 is permanently terminated. The credit originated in 2001 is still active in tax year 2005. In tax year 2005, the average level of employment at the QBF is 8. This is greater than revised maximum level of employment available for the 2001 credit which is 7. There is no adjustment to the employees for the 2001 credit in this year. The employee level is still 2. (7-base of 5 = 2) The investment level at the QBF in tax year 2005 is $375,000. This is greater than the original qualifying level of investment for the 2001 credit. There is no adjustment to the level of investment for the 2001 credit ($258,000). The increase of investment remains at $58,000 for the 2001 credit.


Same or Substantially Identical Revenue Producing Enterprise
Question
38. The taxpayer purchased a facility that was previously a manufacturing plant. The taxpayer will also be operating a manufacturing plant. The building has been empty for the past three months. Negotiations to purchase or rent the old facility began after the facility was closed by the previous owner. Does this facility qualify for the credit?

Answer
K.S.A. 79-32,154(b) provides the definition of qualified business facility as, “a facility which satisfies the requirements of paragraphs (1) and (2) of this subsection.
(1) Such facility is employed by the taxpayer in the operation of a revenue producing enterprise, as defined in subsection (c). Such facility shall not be considered a qualified business facility in the hands of the taxpayer if the taxpayer's only activity with respect to such facility is to lease it to another person or persons. If the taxpayer employs only a portion of such facility in the operation of a revenue producing enterprise, and leases another portion of such facility to another person or persons or does not otherwise use such other portions in the operation of a revenue producing enterprise, the portion employed by the taxpayer in the operation of a revenue producing enterprise shall be considered a qualified business facility, if the requirements of paragraph (2) of this subsection are satisfied.
(2) If such facility was acquired by the taxpayer from another person or persons, such facility was not employed, immediately prior to the transfer of title to such facility to the taxpayer, or to the commencement of the term of the lease of such facility to the taxpayer, by any other person or persons in the operation of a revenue producing enterprise and the taxpayer continues the operation of the same or substantially identical revenue producing enterprise, as defined in subsection (i), at such facility.”

The fact that negotiations began after the old manufacturing plant was closed is evidence that the facility was not part of an overall plan to acquire an ongoing business and if the taxpayer otherwise qualifies for the credit they may claim the credit.



Date Composed: 01/24/2006 Date Modified: 01/24/2006