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State expands research and development tax credits for machinery purchases

03/01/2016  |  By: Andrew E. Hill, JD, Senior, Credits and Incentives

If your business has purchased equipment for research and development, a change in the tax law last year could mean you get a valuable break.

The industrial machinery tax credit that has been in the law for years has traditionally benefited only manufacturers because it applied to the purchase of machinery used in the “fabrication or processing of tangible personal property” or certain related manufacturing activities.

It’s valuable because it can offset as much as 50 percent of a company’s franchise and excise taxes, and can carry forward for as many 15 years.

Lawmakers broadened the definition of industrial machinery, opening the door for a much wider array of businesses to qualify.

The new language says industrial machinery can include “machinery, apparatus, and equipment” including parts, repairs, and installation “that is necessary to, and primarily for, the purpose of research and development.”

The change expands the credit for manufacturers, but also for companies not considered manufacturers who make equipment purchases for research and development. For example, a company that develops software might buy equipment, pay for installation, or incur repair costs as part of its research and development. Or a pharmaceutical company developing new drugs might have equipment costs related to its research.

Those costs will need to be segregated, but any purchases after July 1 this year that fall into the new category could be eligible for the credit.

What’s more, additional savings accrue since purchases for “industrial machinery” are also exempt from sales and use taxes. If sales and use was already paid, the company could qualify for a refund.

The state offers several credits as a way to encourage investment and business in Tennessee, and a few other changes this year might also bring significant savings to your business.

For example, new credits have become available related to the cost of moving back-office functions to Tennessee. Previously, the “Headquarters Tax Credit” limited such credits to construction and relocation costs associated with moving a headquarters to Tennessee. But now, you may have your headquarters somewhere else, move your call center or accounting center to Tennessee, and still qualify.

With changes in law with the Revenue Modernization Act last year, it could be beneficial for businesses to check with their accountant about what new credits might help them.

Andrew Hill is a senior accountant with LBMC’s State & Local Tax Services division. He can be reached at (615) 309-2685 or