Questions and Answers

Identifying Information:IRB Lease Payments
Tax Type:Corporate Income Tax; Individual Income Tax
Brief Description:IRB Lease Payments
Keywords:
Approval Date:01/10/2003



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Question: Are payments made by a business to extinguish industrial revenue bonds for the use of real or tangible personal property considered as lease payments for purposes of the business and job development credit and high performance incentive program investment credit when determining qualified business facility investment?

Answer: No. When determining qualified business facility investment for purposes of the business and job development credit (K.S.A. 79-32,153 and 79-32,160a) and the high performance incentive program investment credit (K.S.A. 79-32,160a(e)), the value of the “qualified business facility investment” property, for purposes of calculating the credit, shall be the actual original cost of the property, if owned by the taxpayer, or eight times the net annual rental rate, if leased by the taxpayer. Property funded by IRB’s in which a business has assumed the burdens and benefits of ownership of the property, shall be valued at its original cost.

K.S.A. 79-32,154(e) defines qualified business facility investment as:
For the purpose of determining qualified business facility investment, the taxpayer must determine how the real and tangible personal property are treated for both apportionment purposes and federal income tax purposes.

When determining the apportionment factor of net income, K.S.A. 79-3280 defines the property factor as:
K.S.A. 79-3281 provides:
K.A.R. 92-12-88 provides in part:
For federal income tax purposes, the entity that has the burdens and benefits of ownership is considered to be the owner. An IRB arrangement requires the business to make payments to satisfy a financing arrangement rather than as a lease payment for property. An IRB financing arrangement provides that the political subdivision holds title to the property as a security, but bears no burden of property ownership. The payments made by the business are used to extinguish the IRB’s that were issued to pay for the property. These payments are made to the trustee rather than to the political subdivision.

Because this arrangement is a financing agreement in which the business takes ownership of the property at the time the bonds are extinguished, and because the business assumes the burdens and benefits of property ownership before title transfers to the business, the business shall consider the property financed with IRB’s as owned. The business must determine the property’s actual cost and report that cost when computing “qualified business facility investment” for purposes of the business and job development credit and the high performance incentive program credit. This property shall also be valued at cost when computing the property factor for income apportionment purposes.

In summary, property that is funded by IRB’s, where a business has assumed the burdens and benefits of ownership of the property, shall be valued at its original cost. The base year calculation for property funded by IRB’s in which the business assumed the burdens and benefits of ownership of the property, shall be valued at its original cost as well.

Based on prior communication with the Department, a business may have valued property funded by IRB’s as leased property and calculated qualified business facility investment at eight times the net annual rental rate. Please be advised that the business shall not be required to amend returns and may use the capitalized lease cost in calculations for the life of that credit. However, for all projects commencing operations after January 1, 2003, all property funded by IRB’s shall be valued at its original cost.




Date Composed: 01/10/2003 Date Modified: 01/10/2003