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Machinery and Equipment for Research and Development

01/13/2017  |  By: Brian McCuller, JD, CPA, Shareholder, Practice Leader Tax

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In addition to the Revenue Modernization Act, a 2015 tax credit bill was passed to help the state spur more economic development.

An expanded definition of “industrial machinery” adds eligibility for the industrial machinery tax credit and sales and use tax exemption for a much wider array of companies who make purchases for research and development.

Previously, these industrial machinery tax credits and sales and use tax exemptions were reserved for the purchase of machinery used in the “fabrication or processing of tangible personal property” or some other related manufacturing activities, and therefore were only available to a narrow segment of businesses.

Under the new definition that went into effect July 1, 2015, eligible industrial machinery is extended to include “machinery, apparatus, and equipment,” including parts, repairs and installation “that is necessary to, and primarily for, the purpose of research and development.” This expanded definition is not just limited to those businesses engaged in traditional manufacturing activities; it applies broadly to any business conducting research and development.

These credits can offset as much as 50 percent of a company’s franchise and excise tax obligation, with a carry-forward for as long as 15 years. The sales and use tax exemption covers the entire sales and use tax obligation. Companies that have already paid sales and use tax on those purchases could qualify for a refund.

The net effect of the new definition is that nearly any business engaged in product development or improvement should now qualify for these credits and exemptions.

Download the Tennessee State Tax Planning Guide