Legislation for Manufacturing Tax Credits to Incentivize Capital Investments

On March 18, Assemblyman Tim Grayson (D-Concord), amended his Assembly Bill 904 to enact tax credits for manufacturing machinery and equipment. The bill would amend Sections 17039.3 and 23036.3 and add Sections 17053.50 and 23650 to the Revenue and Taxation Code. As a tax levy, the bill would take effect immediately upon chaptering.

Section One of the bill would amend Revenue and Taxation Code Section 17039.3 (in the personal income tax law) to include the credit allowed by Section 17053.50 relating to credit for manufacturers’ machinery and equipment to the $5 million cap on the use of business tax credits between January 1, 2020 and December 31, 2022.

Section Two of the bill would add Revenue and Taxation Code Section 17053.50 (in the personal income tax law) would provide a tax credit for eleven years for qualified taxpayers for a percentage of the amount paid for qualified personal tangible personal property up to $1 million. The credit would be allowed from tax years beginning January 1, 2021 through 2031.

The bill would define the terms “fabricating,” “manufacturing,” “primarily,” “processing,” “qualified business,” “qualified personal tangible property,” “qualified taxpayer,” “refining,” and “useful life.”

A “qualified business” would be defined as a business described in Sector Codes 31 to 33, inclusive, of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2017 edition. “Qualified personal tangible property” would be defined as including items such as machinery and equipment, including component parts, and equipment or devices used or required to operate, control, regulate, or maintain the machinery. It would also include special purpose buildings and foundations.

Any excess credit can be carried over to reduce the “net tax” in the following taxable year, and succeeding years if necessary, until the credit is exhausted. However, a credit allowed for qualified personal tangible property paid or incurred by a taxpayer while employing fewer than 100 people in a qualified business shall not be carried over to reduce the “net tax” in a taxable year beginning on or after January 1, 2035. In addition, a credit allowed for qualified personal tangible property paid or incurred by a taxpayer while employing 100 or more people in a qualified business shall not be carried over to reduce the “net tax” in a taxable year beginning on or after January 1, 2034.

Section Three of the bill would amend Revenue and Taxation Code Section 23036.3 (in the corporation tax law) to include the credit allowed by Section 23650 relating to credit for manufacturers’ machinery and equipment to the $5 million cap on the use of business tax credits between January 1, 2020 and December 31, 2022.

Section Four of the bill would add Revenue and Taxation Code Section 23650 (in the corporation tax law) to contain all of the same provisions as set forth in Section Two of the bill.

Section Five of the bill would provide legislative findings and declarations related to compliance with Revenue and Taxation Code Section 41. The purpose of this bill would be to incentivize manufacturers to make capital investments and encourage increased production in California. It is also to provide additional economic incentives to both attract and retain manufacturing in the state while mitigating other costs, impacts, and pressures of operating in California, as well as to support small and medium-sized manufacturers that have borne a disproportionate share of the economic burdens and increased capital costs causes by COVID-19.

The bill is expected to be heard in its first policy committee in April.