Recapture Rules -- (See Regulation 17053.37-0 for Table of Contents.)
(a) In General. The JSF Property Credit shall not be allowed or shall be recaptured under the rules of this regulation in any case where a disposition occurs within one year or less of the date the qualified property is first placed in service in this state.(b) Disposition. For purposes of this regulation, the term "disposition" shall include any of the following events: (1) Removal of the qualified property from this state;(2) Disposition of the qualified property to any party that is not a related party (as defined in Internal Revenue Code sections 267, 318 or 707), whether by sale, gift, a transfer upon the foreclosure of a security interest, or otherwise;(3) Use of the qualified property by the qualified taxpayer primarily in any non-qualified activity; or(4) Acquisition by a lessee (or any party related to the lessee under Internal Revenue Code sections 267 or 318) of qualified property that is being leased by such lessee. However, the term "disposition" shall not include any of the following events:
(A) a mere transfer of legal title to a creditor upon creation of a security interest;(B) a transfer by a qualified taxpayer of legal title to qualified property to a lessor where the lessor is not treated as the tax owner of such property and the lease is properly characterized as a financing transaction under California income tax principles;(C) any election by a C corporation to become an S corporation; or(D) any destruction of qualified property which qualifies as an involuntary conversion under Internal Revenue Code section 1033.(c) Disposition of Qualified Property During the Taxable Year Placed in Service. In any case where there is a disposition of qualified property during the same taxable year in which such qualified property is first placed in service in this state, no JSF Property Credit shall be allowed to the qualified taxpayer for that property for the taxable year in which the qualified property is placed in service. EXAMPLE: H, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On March 1, 2001, H pays $700 (plus California sales tax) for 10 personal computers and immediately places the computers in service in H's manufacturing facility in Burbank. On September 1, 2001, H acquires 10 new computers (which are immediately placed in service in H's manufacturing facility) for $800 (plus California sales tax) to replace the 10 computers already in service, and H instead uses the old computers to perform general administrative functions such as payroll and marketing. Under these facts, when H files its California tax return for its taxable year ending September 30, 2001, H is not entitled to claim the JSF Property Credit for the 10 personal computers acquired on March 1, 2001, because the computers are treated as having been disposed of during the same taxable year as they were placed in service as a result of H's use of these computers in an activity that is not a qualified activity. However, the 10 new computers acquired on September 1, 2001, may qualify for the JSF Property Credit for H's taxable year ending September 30, 2001.
(d) Disposition of Qualified Property During a Taxable Year Subsequent to the Taxable Year Placed in Service. In any case where there is a disposition of qualified property within one year of the date that such qualified property is first placed in service in this state, but such disposition occurs in a different taxable year than the year in which the qualified property is placed in service in this state, then any JSF Property Credit that was allowed with respect to the qualified property shall be recaptured by adding the recaptured JSF Property Credit to the tax of the qualified taxpayer for the taxable year during which the disposition occurs (except as provided in subsection (e) of this regulation). EXAMPLE: F, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On August 15, 2001, F acquires 20 new computers for $600 (plus California sales tax) and immediately places the computers in service in H's manufacturing facility in Glendora. On May 15, 2002, F removes the 20 computers from F's manufacturing facility in Glendora and transports them for use in F's New Mexico manufacturing facility. Assuming F had been allowed a JSF Property Credit on its taxable year ending September 30, 2001, California tax return for the computers acquired on August 15, 2001, F must recapture the entire JSF Property Credit allowed by adding such amount to F's tax for its taxable year ending September 30, 2002.
(e) Adjustment of Carryforwards when Disposition Occurs. In any case where a qualified taxpayer is required to recapture any previously allowed JSF Property Credit under the rules of this regulation, then, prior to the addition of any recaptured amounts to the tax under subsection (d) of this regulation, any outstanding JSF Property Credit carryforwards shall first be reduced to the extent necessary to fully absorb the recapture amount. Any recapture amount remaining after application of the preceding sentence shall be added to the tax under the rules of subsection (d) of this regulation. EXAMPLE 1: On May 1, 2002, within one year of placing qualified property in service in this state, K disposes of qualified property for which a $150 JSF Property Credit was previously allowed. Under the rules of this regulation, K is required to recapture the entire $150 JSF Property Credit. Assume K had $400 in JSF Property Credit carryforwards that were available for use in 2002. Under these facts, K would reduce its available JSF Property Credit carryforwards to $250 ($400 minus $150). Since no additional recapture amount remains, K is not required to increase its tax for 2002 to reflect the $150 recapture amount.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of $400 in available JSF Property Credit carryforwards, K had only $100 in available JSF Property Credit carryforwards. Under these facts, K would first reduce its available JSF Property Credit carryforwards to zero, and would then increase its tax for 2002 by $50 ($150 recapture amount less $100 used to reduce available JSF Property Credit carryforwards).
(f) Recapture of JSF Property Credit Allowed to Pass-Through Entities.(1) Partnerships and Partners. If a partnership places qualified property in service in this state, claims the JSF Property Credit to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the property for a purpose not qualifying for the JSF Property Credit, then the JSF Property Credit shall be recaptured under Revenue and Taxation Code section 17053.37, subsection (g), and this regulation. The amount of JSF Property Credit subject to recapture shall be allocated among the partners in the same ratio that the JSF Property Credit was allocable to each partner for the qualified property subject to the recapture, and shall be added to the "tax" of the partner for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use. EXAMPLE 1: Assume that C and D are equal partners of M, a partnership that is a qualified taxpayer. During M's taxable year beginning in 2001, M is allowed a total JSF Property Credit of $100. C and D each are able to utilize their entire 50% share of the 2001 JSF Property Credit to offset their respective 2001 tax liabilities, so that there is no JSF Property Credit carryover amount for either C or D. Assume further that in 2002, within one year of the date the qualified property was placed in service, M moves the qualified property to another state, thereby triggering a recapture of the JSF Property Credit. C and D are required to recapture their distributive share of the JSF Property Credit already applied to their respective 2001 tax liabilities on their respective 2002 California tax returns by adding the recaptured JSF Property Credit amounts to their respective "tax" for 2002.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C uses all of C's share of the JSF Property Credit to reduce C's 2001 tax liability, but D carries over all of D's JSF Property Credit to 2002. On C's 2002 California tax return, C will be required to recapture C's share of the JSF Property Credit that was used to reduce C's "tax" for 2001 and D will be required to reduce its JSF Property Credit carryover to zero. D will not be required to increase D's "tax" for 2002 by the amount of D's share of the JSF Property Credit because D was unable to apply the amount to reduce D's tax liability for 2001.
(2) S Corporations and Shareholders. (A) Corporate Level Recapture. If an S corporation places qualified property in service in this state, claims the JSF Property Credit to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the qualified property for a purpose not qualifying for the JSF, then the JSF Property Credit shall be recaptured under Revenue and Taxation Code section 17053.37, subsection (g), and this regulation. The amount of any JSF Property Credit recaptured by the S corporation shall be added to the "tax" of the S corporation imposed under Chapter 4.5 of Part 11 of the Revenue and Taxation Code, except that the JSF Property Credit recapture amount added to the "tax" of the S corporation shall be appropriately reduced by the amount by which the S corporation was required to reduce such JSF Property Credit under Part 11 of the Revenue and Taxation Code.(B) Pass-through of JSF Property Credit Recapture Amount to Shareholders. In any case where a "disposition" of qualified property by an S corporation occurs, the amount of JSF Property Credit subject to recapture shall be allocated among the shareholders of the S corporation in the same ratio that the JSF Property Credit was allocable to each shareholder for the qualified property subject to the recapture, and shall be added to the "tax" of the shareholder for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use. EXAMPLE: Assume that Q, an S corporation with three equal shareholders (E, F, and G), is allowed a JSF Property Credit in 2001 that Q is fully able to utilize to reduce Q's 1.5% S corporation tax liability. Assume further that E, F, and G each claims a one-third ( 1/3) share of the JSF Property Credit allowed to Q, and that each shareholder is able to utilize their entire distributive share of this JSF Property Credit on their respective 2001 California tax returns. In 2002, within one year of the date the qualified property was placed in service in California, Q sells the property to an unrelated party. Under these facts, Q, E, F, and G must each recapture the JSF Property Credit allowed and claimed by each on their respective 2001 California tax returns by adding such recapture amount to their 2002 respective California "tax" or "net tax," as the case may be.
Cal. Code Regs. Tit. 18, §§ 17053.37-8
1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4). Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).