Under current law, a taxpayer that purchases or leases machinery or equipment and places it in service in North Carolina may qualify for a North Carolina state tax credit. In general, the machinery and equipment must be of the kind that is capitalized for tax purposes to be eligible for the credit. The credit is equal to an "Applicable Percentage" of the cost of the machinery and equipment after deducting a "Threshold" dollar amount determined by the statute. For taxpayers located in certain counties, the Applicable Percentage is about to be reduced, and the Threshold amount will be increased. There is a way to lock in the current rates to keep from losing this tax credit!
Changes in Threshold and Applicable Percentage Amounts
Currently, the state ranks its counties by tiers and the Threshold amount varies depending on the county in which the machinery and equipment is placed in service.(1) A recent statutory amendment will change the amount of the Threshold and Applicable Percentage for business activities occurring on or after January 1, 2003. The Threshold and Applicable Percentage will be changed as follows:
Current Threshold and Applicable Percentage Amounts
| |
Threshold |
Top Applicable Percentage |
| Tier 1 |
$0 |
7% |
| Tier 2 |
$100,000 |
7% |
| Tier 3 |
$200,000 |
7% |
| Tier 4 |
$500,000 |
7% |
| Tier 5 |
$1,000,000 |
7% |
Threshold and Applicable Percentage Amounts as of January 1, 2003
| |
Threshold |
Top Applicable Percentage |
| Tier 1 |
$0 |
7% |
| Tier 2 |
$100,000 |
7% |
| Tier 3 |
$200,000 |
6% |
| Tier 4 |
$500,000 |
5% |
| Tier 5 |
$1,000,000 |
4% |
Preserving the Current Threshold and Applicable Percentage
To preserve the current Threshold and seven percent (7%) Applicable Percentage for the next two (2) years, taxpayers must file a Letter of Commitment with the North Carolina Secretary of Commerce on or before December 31, 2002. By filing this letter, the taxpayer is stating its intent to place specific eligible machinery and equipment in service within two (2) years. The letter provides a commitment on behalf of the state to hold the taxpayer’s current position. If you have plans to place specific eligible machinery or equipment into service within the next two (2) years, you should file this letter to secure tax credits at the current level. The form Letter of Commitment provided by the Department of Commerce is provided with this alert as Attachment A.
Preserving the Current Tier
Counties’ Enterprise Tier designations can change annually, but taxpayers can lock in their current tier level for the machinery and equipment credit or the job creation credit by filing an additional Letter of Commitment with the North Carolina Secretary of Commerce. To preserve your tier for both of these credits, you must file a separate letter of commitment for each credit. If your planned project is in a county assigned to tier one, two, three or four, you should file this letter to preserve your business’ tier assignment. The form Letter of Commitment to hold the current tier level for the machinery and equipment credit is provided with this alert as Attachment B. The form Letter of Commitment for the job creation tax credit is provided as Attachment C.
Communication from the Department of Commerce on December 20, 2002, indicates that the Department cannot guarantee the availability of these tax benefits unless you use their forms to draft your letter.
You may file the letter(s) of commitment by facsimile to insure that the Department of Commerce receives it on or before December 31, 2002. If you choose to file by facsimile, send an additional copy of the letter before December 31, 2002 using a mail service that provides a receipt showing the date of mailing.
George Pretty, Al Guarnieri or Jimmy Greene at Parker Poe can help you determine whether you would qualify for a tax credit for investment in machinery or equipment, and if so, guide you through the necessary steps to request Letters of Commitment from the Department of Commerce before the rates change.
(1) On or around December 31 of each year, the Secretary of Commerce assigns an “Enterprise Tier” designation to each county in North Carolina. This designation is based on the county’s unemployment rate, per capita income, percentage growth and other factors. A list of North Carolina counties and their designated tiers is available on the North Carolina Department of Commerce website at www.nccommerce.com/finance/tiers/2002tiers.asp